Month: January 2017

Mortgage calculator

Forecasting mortgage interest rates for 2017 is like trying to predict the outcome of a contest between an irresistible force and an immovable object. In this case, the irresistible force is the global economy, and the immovable object is the Fed, but in the current environment the Fed has an 800-pound gorilla that they can unleash if they choose.

Interest rates are low relative to our current position in the business cycle, but the fitful character of the recovery has made the Fed reluctant to increase them. They expected three hikes last year but ended up with one in December. Most forecasters expect this dynamic to continue through 2017, with a weak economy hampering the Fed from implementing desired rate hikes, and so predict only a small increase in rates before the end of the year.

This outlook factors in the impact of Brexit and President Trump’s disregard for free trade policies, which both bode ill for global growth in 2017. It also includes the fact that the current recovery has not fueled strong wage growth or led to an increase in first-time home buyers.

More first-time home buyers coming into the market would push rates upward, but this seems unlikely in 2017. Although recent unemployment numbers are encouraging, the labor participation rate remains low, suggesting that new jobs created by the recovery would lure workers from the sidelines before positively impacting wages. Many first-time buyers would also enter the market through a sub-prime mortgage, but that sector continues to suffer from the hangover of the pre-2008 party.

There seems little on the opposite side of the equation to argue that an increase in rates is likely, other than the Fed’s announced preference for higher rates, presumably to have the ability to lower them in the next economic downturn. This assessment ignores the potential impact of both inflation and economic growth.

Inflation was named the Fed’s arch-enemy by Paul Volker and it has never left that position, even though it has only been a theoretical threat throughout the current expansion. However, President Trump’s robust spending plan to rebuild American infrastructure could put enough money into the economy to stimulate inflation. Fed announcements have certainly documented a watchful eye on inflation, and an increase would likely cause the Fed to increase rates quickly, even at the risk of harming a fragile economy.

Of course, President Trump has promised that the economy will no longer be fragile. He and Speaker of the House Paul Ryan are such strong proponents of Regan-era economic policies it is possible they have matching tattoos of the Laffer Curve. A significant reduction in income tax rates could produce robust economic growth. A similar curve theoretically exists in regards to federal regulations, so that a simplification of the tax code in the context of lower rates could have a more pronounced effect. President Trump has already made headway in keeping a campaign promise to reduce federal regulations, and a change in the health care environment may accelerate these results.

If these policies have their intended impact, even without a dilatory awakening of inflation, the Fed would have greater latitude to raise rates. They could do so, without the perceived negative impact of announcing a change by unleashing their 800-pound gorilla, namely the bloated balance sheet inherited from the financial crisis.

This balance sheet includes $1.8 trillion in mortgage-backed securities. The Fed has trimmed its holdings through natural attrition as the underlying mortgages were refinanced due to its own low-interest rate policies. This has created a temporary floor on mortgage rates. However, if the Fed began to sell these instruments prior to maturity it would cause rates to rise.

This would meet the Fed’s policy goals of higher rates, and would fit within a narrative of reducing the size of the Federal government and undoing the legacy of the previous administration. Any need to lower rates in the future could then be met through another episode of quantitative easing rather than rate announcements.

These factors argue in favor of higher mortgage rates in 2017, particularly in the latter part of the year when fiscal and regulatory reform have begun to impact the economy. Forecasts of rates for 30-year fixed mortgages at 4.6 percent may be as much as 75 basis points too low if the Trump Administration implements policies that are successful in stimulating economic growth.

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luxury home

A jumbo loan is not a term most people are familiar with. Yet there are times when a jumbo loan is the perfect fit for your home financing needs.

Before you decide whether a jumbo loan is the right loan vehicle, it is helpful to be aware of how jumbo loan terms and requirements can differ from one county to the next. It is equally important to understand how to prepare yourself for success when seeking a jumbo loan approval.

In this article, learn what you need to know about jumbo loans to take the next step and seek this type of home financing.

Jumbo Loan: Defined

A jumbo loan today is also called a jumbo mortgage and a non-conforming mortgage. The name is fairly self-descriptive. Basically, a jumbo loan exists to finance homes priced above what the conventional mortgage loan limit (Freddie Mac and Fannie Mae) is designed to accommodate.

For comparison purposes, let’s take a look at conventional mortgage loan limits nationwide. According to Bankrate, the United States is divided into 3,143 counties. 2,916 counties limit conventional mortgage loans to $417,000 or less.

108 additional counties have a limit of $625,500. 115 counties have limits that fall between $417,000 and $625,500. And four counties (all in Hawaii) have limits ranging from $657,800 to $721,050.

Here, you can see that the conventional mortgage loan limit relates to average housing costs in different counties. Some counties have higher housing costs than other counties, and in the former category, loan limits are also higher.

Where Jumbo Loans Enter In

But what if you wanted to purchase a home that is priced higher than the conventional loan limit in your county? You can’t get sufficient loan financing via government-financed loan entities (90 percent of all home loans are issued this way).

So what you need is a jumbo mortgage. In most cases, if you are looking at a home priced above $417,000, you are looking at what is considered a “luxury” or “high end” property. Often these property types are priced at $500,000+, plus you may need financing to cover closing costs, renovations, or homeowners insurance premiums.

Here, a jumbo mortgage is definitely the financing vehicle you need. Now you just have to qualify for it!

How to Qualify for a Jumbo Loan

While these requirements may vary somewhat based on the sticker price of the home you wish to purchase, this list from Investopedia outlines general starting requirements to qualify for jumbo mortgage financing:

  • Excellent credit. A score of 700+ is typically required just to get your foot in the door. If you can score at 720 or higher, you have a better shot at being approved.
  • Proof of income consistency. Tax returns, W-2 forms, or similar evidence plus proof of sufficient liquid assets (6 to 12 months’ worth of mortgage payments) will generally be requested up front during the application process.
  • Debt to income ratio (DTI). Your lender will look closely at your debt to income ratio to ensure the addition of a jumbo mortgage will not predispose you towards default. For conventional mortgages, generally the most desirable DTI is 43 percent or lower. You may find your DTI needs to be lower still to qualify for the jumbo version.
  • Down payment. In the case of down payments, you will find standards to be more relaxed. Some lenders may be willing to accept a down payment as low as 10 percent when granting a jumbo mortgage, while others may still require 20 percent or higher.

Interest Rates for Jumbo Loans

Jumbo loans generally offer comparable interest rates with conventional mortgage loans. However, where issues can begin to arise is when that time comes each year to file your annual income tax returns.

The IRS only allows homeowners to deduct interest paid on mortgage loans up to a certain amount, which currently is set at $1.1 million per person.

If you are purchasing a home with a partner and the two of you are not married, you may each be able to write off $1.1 million worth of interest paid on your jumbo mortgage. If you are married and purchasing a home using a jumbo mortgage, however, you will be capped at $1.1 million.

In all things tax related, it is always best to consult with your certified public accountant for the latest IRS regulations and requirements.

When shopping for a jumbo loan, it is advisable to seek at least three to five quotes to compare before making your choice. As well, look closely at the interest advantages of fixed versus adjustable rate mortgages to see where you will pay the least interest over the course of your jumbo mortgage loan.

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