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Housing Recovery Depends On Continuation of Low Mortgage Rates

Written by on Tuesday, 27 November 2012 6:00 pm
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There are multiple aspects to the housing recovery that are taking place. While each individual sector of the industry is showing improvement, there is one common factor among all of them and that is the entire housing recovery depends on the continuation of low mortgage rates. It is for this reason that the Fed initiated QE3 which is intended to do just that. By purchasing $40 million of mortgage backed securities each month for an extended period of time, the Feds are keeping rates down in the hopes that the housing recovery will lead to an economic recovery that includes more jobs.

As interest rates remain low, more consumers will be inspired to purchase homes, rehabilitate homes or refinance. This chain of events eventually puts more money into the economy, which as a result of supply and demand, increases job opportunities. The results over the past months are showing that it is working. This week, the Commerce Department reported that housing starts soared to the highest level in more than four years during the month of October. Housing starts jumped 3.6% to a seasonally adjusted annual rate of 894,000 units which represents the highest level since July of 2008 and 41.9% higher than a year ago.

However, the U.S. Census Bureau and the Department of Housing and Urban Development reported that housing permits for residential construction were down 2.7% in October as we head into winter, although this is still 29.8% higher than October 2011. Without low mortgage rates, many consumers would not be able to qualify for a mortgage based on today's qualifying guidelines. Lower rates are keeping monthly mortgage payments down which results in a lower debt to income, which is necessary under the current credit restrictions.

According to FreeRateUpdate.com's survey of wholesale and direct lenders, mortgage rates remained the same this week with 30 year fixed mortgage rates as low as 3.10%, 15 year fixed mortgage rates as low as 2.375% and 5/1 adjustable mortgage rates as low as 2.250%. Good credit is a necessity in order to receive these lowest mortgage rates available. Borrowers must also be able to fully document employment, income and assets in order to receive approval. Guidelines for home purchase loans and traditional mortgage refinances have specific maximum ratios for debt to income and loan to value (which is determined by the appraisal).

On the other hand, HARP 2.0 is a more streamlined mortgage refinance that often does not require an appraisal or other documentation. It is available for borrowers who already have loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009. With no loan to value caps, HARP 2.0 helping underwater borrowers refinance to lower rates, thus putting more money into their own pockets each month to be spent elsewhere in the economy. Mortgage rates are low and lenders are available to give borrowers the information that they need. The online form is available for this reason and, upon submission, will return a response almost instantly.

Now that FHA has made their announcement of increasing the annual mortgage insurance premium and eliminating the right to cancel mortgage insurance, both coming in 2013, the question remains whether consumers will still be able to be approved for FHA mortgages. FHA has raised its insurance premiums several times since the housing crisis started. Each time the same question has cropped up, each time it has worked itself out and consumers are still purchasing homes with FHA mortgages. FHA estimates that the annual mortgage fee will increase a mortgage payment by approximately $13 per month.

For most borrowers purchasing a home, this small amount will not keep them from moving forward. FHA mortgage rates have been at historical lows all year which has increased home affordability. Current FHA 30 year fixed mortgage rates are as low as 3.00%, FHA 15 year fixed mortgage rates are as low as 2.625% and FHA 5/1 adjustable mortgage rates are as low as 2.250%. Even though FHA closing costs (APR) are high because of the upfront mortgage insurance premium and other FHA fees, these costs can be brought down with FHA approved gifts, the use of housing grants or loans and seller concessions which are still at 6%.

In addition, FHA's streamline refinance with no cash out, which does not require any documentation or appraisal, is still the easiest way to trade in an older FHA loan with higher mortgage rates to take advantage of the current low rates being offered. For those borrowers who have loans that were FHA endorsed prior to June 1, 2009, FHA is offering drastically reduced upfront and annual mortgage insurance premiums until the end of 2013. These reduced fees will remain intact for the life of the loan. For FHA mortgage products, borrowers must use an FHA approved lender. For this purpose, the online form is available for submission and is the easiest way to obtain information about FHA mortgage programs.

Higher priced property sales are also seeing an increase in business. Low jumbo mortgage rates, which are not much higher than conventional mortgage rates, are helping this part of the housing industry as well. Current jumbo 30 year fixed mortgage interest rates are as low as 3.125%, jumbo 15 year fixed mortgage rates are as low as 2.625% and jumbo 5/1 adjustable mortgage rates are as low as 2.250%.

While jumbo mortgage require that borrowers have excellent credit in order to receive these lowest mortgage rates, this is not often an issue since borrowers in this category are usually well qualified. Since these loans are generally held within a lender's portfolio, they are profitable for lenders who are now starting to compete for this business. While there is also risk involved, lenders reduce this by seeking quality loans that will perform well. This competition is making it necessary for jumbo mortgage borrowers to shop around for the best deal which can be done through the online form.

Mortgage rates are affected by MBS prices (mortgage backed securities) and move in the opposite direction. With the shortened holiday week, there was little movement in markets, including MBS prices. Economic data released showed that Consumer Sentiment inched up for the month of November, according to the Thomson Reuters/University of Michigan. The reading showed an increase to 82.7 from 82.6 in October. Leading Indicators rose 0.2% in October. Jobless claims fell 410,000 which was lower than expectations. Last week, Federal Reserve Chairman Bernanke warned that not addressing the fiscal cliff is a major threat that could lead the economy back into a recession. He also stated that if the fiscal cliff is addressed and solved, the new year could be a very good year.  

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at about a 1 point origination fee.

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  About the author, Ed Ferrara

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.
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