Market Watch – Fed Pauses On Rates

The news from the Federal Reserve this week is a pause on rate hikes and while the Fed does not set these rates outright, its monetary policies and decisions inevitably echo through the housing market. This relationship has been notably evident through the 11 rate hikes since early 2022, leading to the Fed’s recent announcement of a pause in September.

A Glimmer of Hope for the Housing Market
Housing economists have found solace in this pause, with anticipations that the steep incline in mortgage rates may be nearing its terminus.

Mike Fratantoni, the Chief Economist at the Mortgage Bankers Association, states, “We anticipate a continual decline in inflation, aligning it closer to the Fed’s target. Concurrently, the job market is projected to decelerate, reflecting expectations that the Fed’s 2024 movements will be characterized by cuts instead of increments. This shift is foreseen to ameliorate affordability for prospective homebuyers.”

The Mechanisms of the Federal Reserve
The Federal Reserve delineates the borrowing expenses for short-term loans through modifications in its federal funds rate. This integral rate defines the interest paid by banks to each other for overnight reserve borrowing from the Fed.

Since 2022, the elevation of this fundamental rate was adopted as a strategy by the Fed to mitigate inflation, inadvertently escalating the borrowing expenses for Americans.

It is crucial to note that fixed-rate mortgages, which dominate the home loan sector, do not replicate the federal funds rate. Instead, they are anchored to the 10-year Treasury yield. However, the fed funds rate does shape the contours of short-term loans like credit card rates and adjustable-rate mortgages.

The Federal Reserve also engages in the purchase and sale of debt securities, sustaining the credit flow and subsequently impacting mortgage rates.

Diverging Influences on Mortgage Rates
The intricacies of fixed-rate mortgages are inherently tied to the 10-year Treasury yield. The fluctuations in this yield reverberate through fixed-rate mortgages, although the exact mortgage rate maintains a gap with the yield. This gap has extended to 3 percentage points through much of 2023, inflating the cost of mortgages.

Mortgage rates move based on variety of factors including inflation, supply and demand balance in mortgage lending, and the secondary mortgage market dynamics.

Of course if you’re looking to finance a home loan check with us – you can fill out our 60 second analysis on our website or just schedule a meeting and we can review your options and see what best fits your needs!

10/1 ARM Overview

What’s a 10/1 ARM?
An ARM is a mortgage with an interest rate that can adjust over time in response to changes in the market. The 10/1 ARM has a fixed interest rate for the first decade, followed by annual rate adjustments for the next 20 years. This makes it distinct from traditional fixed-rate mortgages which lock in one rate for the entirety of the loan term.

The beauty of the 10/1 ARM lies in the balance it offers: the certainty of a fixed rate for a substantial period and the potential savings from rate adjustments thereafter.

How the 10/1 ARM Rate Works:
Essentially, the interest rate on a 10/1 ARM is determined by a combination of a fixed margin rate and a variable index rate. The index rate reflects general market interest rates and can move up or down, while the margin remains constant.

Lenders often offer a cap on how much the interest rate can adjust. For instance, a 2/2/5 cap structure means:

A maximum of 2% increase at the first adjustment after 10 years.
A maximum of 2% increase for subsequent annual adjustments.
A total maximum of 5% increase over the life of the loan above the starting rate.
The Good and the Bad of 10/1 ARM:


Initial Savings: With typically lower initial interest rates than fixed-rate mortgages, the 10/1 ARM offers initial cost savings.
Potential for More Home: The lower initial payment might enable you to afford a larger or better-situated house.
Further Savings: If market rates fall after the fixed period, your interest rate and payment can also decrease.

Future Cost Risks: After the 10-year fixed period, you are exposed to potential rate hikes.
Complexity: With multiple variables at play – rate caps, index rate changes, and resets – ARMs can be complex to understand.
The Temptation of Interest-Only Payments: Some ARMs offer the option to pay only interest initially, but this can lead to much higher payments later and risk of negative equity if property values decline.
Comparing the 10/1 ARM with Other Mortgages:

10/1 ARM vs 5/1 ARM: The shorter five-year fixed period of the 5/1 ARM typically offers a lower initial rate but exposes the borrower to rate adjustments sooner.
10/1 ARM vs 7/1 ARM: With a 7/1 ARM, rate adjustments start after seven years, offering a middle ground between the 5/1 and 10/1 ARM.
10/1 ARM vs 30-year Fixed: While the 30-year fixed offers rate certainty, the 10/1 ARM can offer initial savings and the potential for more if rates decrease.
Is the 10/1 ARM for You?
The decision rests on your unique situation. Consider:

The initial rate being offered.
How long you intend to stay in the home.
Your risk tolerance regarding future rate adjustments.
If the initial rate is attractive and you don’t see yourself in the home for significantly more than a decade, the 10/1 ARM might offer significant benefits.

In conclusion, the 10/1 ARM presents an interesting option for homeowners who wish to capitalize on initial savings, while also taking a calculated risk on future interest rates. Schedule a consultation on our website and we can review if a 10/1 ARM is right for you.

Gift To Home: Helping Your Children With The Downpayment

Home ownership is part of the American dream and often thought of as a step towards financial stability. For parents, the thought of helping their child set foot on this path can be both appealing and daunting. Here’s an in-depth look at why and how parents can provide that initial boost.

Why Consider Gifting a Down Payment?
In 2022, the National Association of Realtors revealed an intriguing statistic: 22% of first-time homebuyers were aided by gift funds from family or friends. This underscores the trend of families stepping in to aid the next generation in achieving their homeownership dreams.

In today’s environment, skyrocketing rents, expensive homes, and the looming shadow of student debt make saving for a down payment increasingly challenging for many young people. A down payment gift is a direct way to benefit the child without the long-term obligations and risks associated with co-signing.

Things to Consider Before Gifting
1. Your Financial Health: Before jumping in, it’s crucial to analyze your financial situation. Gifting shouldn’t jeopardize your retirement plans or other financial goals.

2. Your Child’s Financial Savvy: Ensure that your child has the financial knowledge and responsibility to manage homeownership.

3. Tax Implications: Thankfully, gifting for down payments often has fewer tax implications. For 2023, parents can gift up to $34,000 to their child without triggering the gift tax.

The How-To of Down Payment Gifting
1. Assess Your Financial Situation: Reflect on what you can afford without affecting your financial health adversely. As Geller advises, always discuss with your child, understand their finances, and know their repayment strategy.

2. Time the Gift Right: Transfer the gift at least two months before your child’s mortgage application. This “seasoning” period ensures the funds are seen as part of your child’s legitimate assets.

3. Draft a Gift Letter: This letter, addressed to the lender, confirms the nature of the gift. It should detail the amount, purpose, and assure that repayment isn’t expected.

Alternative Ways to Assist
1. Direct Home Purchase: Consider buying the home and having your child repay you. But always consult a real estate attorney before embarking on such agreements.

2. Co-signing or Becoming a Co-borrower: These are valid options but come with their own sets of responsibilities and risks. For instance, as a co-signer, you don’t have ownership, but you are liable for payments if your child defaults.

3. Home Search Assistance: Being a pillar of support during their home search can make the process smoother for your child.

4. Renting Options: Letting your child live with you at discounted rates or for free can help them accumulate savings faster.

In conclusion, gifting a down payment can be a significant step towards ensuring your child’s financial future. You can schedule a meeting with us on our website and we can review your situation and what best makes sense for you. If done right, it can be a win-win situation, paving the way for the next generation’s financial success.

Preparing Your Home For A Storm

As we’ve seen large storms hit both coasts recently, it’s a good idea to use the old Boy Scout motto and “be prepared.” We are going to review general steps to take to prepare for something we of course never happens. Natural disasters, from hurricanes to earthquakes, wield a devastating power that leaves homeowners and entire communities grappling with significant property damage and high repair costs.

The Financial Impact of Natural Disasters on Homes
In 2022, the Insurance Information Institute documented nearly $100 billion in insured losses stemming from natural disasters. Here’s a breakdown of the data:

Severe storms: These accounted for over $29 billion.
Earthquakes: About $14.7 billion per year, as per a joint study between the USGS and FEMA.
Floods: 15 instances in 2022 led to $3.3 billion in losses.
Wildfires: Resulting in a staggering $8.9 billion from 26 separate events.
Hurricanes: Three events led to a total loss of $53.2 billion.
Winter storms: Produced $4.1 billion in damages from 13 occurrences.
How Can Homeowners Prepare?
1. Reinforce Vulnerable Areas
Install wind-resistant doors and storm-proof shutters.
Use plywood to board up windows and doors when a storm approaches.
2. Know Your Utilities
Identify where water, gas, and electrical lines are and know how to shut them off.
3. Water Diversion
Use sandbags around entryways and flood-prone zones.
4. Secure Loose Items
Ensure outdoor furniture is tied down.
Move grills, tools, toys, and other items inside.
5. Tree Maintenance
Trim trees regularly to prevent overhanging branches from causing damage.
6. Furniture Safety
In earthquake-prone areas, attach heavy furniture to walls.
7. Landscaping Smartly
Choose fire-retardant plants like Rockrose and aloe, and avoid flammable trees like pines.
8. Guard Against Pipe Bursts
Wrap vulnerable pipes to protect them during extreme cold.
9. Have an Emergency Plan
Assemble an emergency kit with food, water, medications, chargers, and other necessities.
Keep both digital and physical copies of important documents, including evacuation routes and insurance policies.
What Does Home Insurance Typically Cover?
A standard homeowner’s insurance policy covers damage due to:

However, it’s essential to note that standard policies usually exclude flood or earthquake damage. Those living in vulnerable zones should consider supplemental policies to stay covered.

In conclusion, while the unpredictable force of nature cannot be avoided, homeowners can adopt a proactive stance. By understanding your insurance policy and taking preventive measures, you can shield yourself from the worst financial aftershocks of natural disasters.

Balloon Mortgages: The Good, The Bad, and The Risky

A balloon mortgage might sound like a fun name, but it’s a serious financial commitment. Simply put, it’s a home loan wherein you make low or no monthly payments for a short period, typically five to seven years. Then, you’re expected to make a significant lump sum payment, often called the ‘balloon payment’, to settle the remaining balance. Due to its unique structure, this mortgage can be both tempting and treacherous. Let’s dive into its intricacies.

The Mechanics of a Balloon Mortgage
So, how does this peculiar mortgage work? For a set duration, you’ll make minimal payments that could go solely towards interest or might include a portion of the principal, depending on your loan’s terms. At the end of this period, be ready for the balloon payment – a hefty sum that can exceed double your monthly installments. This structure can manifest in a few ways:

Balloon Payment Structure: Your initial monthly payments might mimic those of a 15 or 30-year mortgage, but the full balance becomes due much sooner, say in 5 or 7 years.
Interest-Only Payments: For a while, you only tackle the interest. When this phase concludes, you owe the remaining loan balance.
No Payments: This high-risk version involves no monthly payments for a brief term, but interest keeps accumulating. Once the term concludes, you owe both the interest and the principal.
The Allure and Concerns of Balloon Mortgages
On the surface, balloon mortgages seem attractive. They promise low initial outlays, the opportunity to buy a home sooner, and the flexibility to focus on other financial objectives. Moreover, they typically lack a prepayment penalty, allowing borrowers to settle their debt earlier without extra fees. However, they come with significant caveats. The looming balloon payment can jeopardize your home ownership if you can’t meet the commitment, leading to foreclosure. Plus, these mortgages are elusive, often bearing higher interest rates than conventional loans, and refinancing can be challenging.

Making Informed Decisions on Balloon Mortgages
So, when does a balloon mortgage make sense? It’s a viable choice for property flippers, intending to sell before the balloon payment is due. If you’re eyeing it for your primary residence, ensure you have a well-planned exit strategy, whether that means selling, refinancing, or paying it off with savings or an anticipated windfall.

Remember, while the prospect of low initial payments might be enticing, balloon mortgages come with undeniable risks. If you’re seeking affordability, consider alternatives like adjustable-rate mortgages (ARMs), FHA graduated payment loans, or VA loans. These might offer the financial relief you need without the looming threat of a massive balloon payment.

Closing Costs Vs Prepaids

Today we are going to cover two terms we often hear used in the home buying process that are sometimes used interchangeably but there are some differences. So we will review “closing costs” and “predpaids” and what makes them different.

The Basics of Prepaids in Home Buying

Prepaids are the advance payments a homebuyer makes to cover specific future expenses before they come due. Typical examples include homeowners insurance premiums and property taxes.

While they are paid at closing, they don’t go directly to the vendor or provider. Instead, your lender will keep these funds in an escrow account. Over time, the lender will distribute payments from this account as required.

Here’s a closer look at standard prepaids:

Mortgage Interest: This is applicable when you close on any day other than the first of the month. The prepaid interest covers the days from closing to the end of that month and is held in escrow for your first mortgage payment. A savvy tip? Closing near the end of the month might save you some money.
Homeowners Insurance: Lenders usually require six to 12 months of homeowners insurance premiums at closing. The lender will then disburse this to your insurance provider monthly.
Property Taxes: Lenders estimate the property taxes you’ll owe and generally request two months of these taxes upfront. From your escrow, they will then forward these payments to your local government.
Initial Escrow Deposit: This deposit often includes two months each of homeowners insurance and property taxes. It ensures your escrow account has a healthy buffer for future bills.
For clarity, these prepaids are detailed in the closing disclosure document provided by your lender, typically three days before closing. You’ll find them on Page 2, Section F.

Deciphering Closing Costs

Closing costs, on the other hand, are the one-time fees paid directly to various parties involved in processing your mortgage. These can be to your lender (like application fees) or third parties (like home inspection fees).

Often, sellers might cover some of these costs as a gesture or part of the sale agreement. These are called seller concessions. However, it’s essential to remember that the buyer always foots the bill for prepaids.

Here’s a snapshot of frequent closing costs:

Loan-related fees: For processing and originating the mortgage.
Appraisal and Inspection fees: To assess the value and condition of the property.
Title-related fees: To ensure the property title is clean and transferable.
Attorney fees: For legal oversight and ensuring all documentation is in order.
Prepaids vs. Closing Costs: The Breakdown

In conclusion, while both prepaids and closing costs are payable at the purchase’s closure, they serve different purposes. Closing costs are direct payments for services rendered, whereas prepaids are essentially a buffer for future homeownership expenses, managed by your lender. Of course, we will guide you through all this when you are getting ready for closing. If you are looking to purchase now and want to review your options go to our website and complete our 60 second purchase analysis.

Home Closing: 5 Top Don’ts Before the Big Day

A lot of people don’t realize that it’s a good idea to watch your financial P’s and Q’s before closing your mortgage. Here are five common mistakes to watch out for to avoid any closing crises.

1. Making a big purchase, including furniture
If you’re about to close on a house, it’s not the best time to get a new car, boat or other expensive item. Even furniture or appliances — basically anything you might pay for in installments — is best to delay until after your mortgage is finalized.
Depending on your credit score and history, these transactions can lower your score, which can impact the interest rate and loan amount you receive. This could result in a higher interest rate for the next 15 or 30 years, or even having to come up with a larger down payment.
Bottom line: Wait to purchase a big-ticket item, because “this can ruin their chances of staying qualified for a loan,” says Patricia Martinez-Alvidrez, business development officer for Stewart Title in El Paso, Texas.
2. Opening a new line of credit
It’s not just big purchases that can alter your credit score. Opening a new credit card or closing an existing one can affect your standing, too. In the runup to your mortgage closing, lenders make an assessment of the credit risk they are taking on and go through several steps to assess that risk for each loan applicant.It’s especially important to protect your credit score if it’s low enough that you’re on the margins of qualifying for a mortgage at the start of the process. Any changes in that case can work against you and might make it impossible to finalize the loan.
3. Switching or quitting your job
Another major mistake to make when you’re about to close on a home purchase is changing jobs. This is because mortgage lenders examine your employment history for consistency, and providing additional documentation on employment to a lender can delay the closing.
If you have any control over your job situation, it’s best to stay put until after you close. A borrower who quits their current job might have to wait a couple of weeks before they can attempt to close again.
4. Disrupting the timeline
Closing on a mortgage is time-sensitive. Even if you’ve locked in your rate, that only guarantees things for so long. It’s important to keep on top of the schedule and make sure all of your paperwork is submitted on time. Otherwise, you risk losing the terms you agreed to and could have to start the process over again.
5. Taking out a personal loan
If you get a personal loan or co-sign a loan for someone else, you could also face hiccups before getting to the closing table. In some instances, the lender might turn you down for a loan altogether even if you were previously preapproved.
It depends on how your credit score and debt-to-income (DTI) ratio is impacted. A good DTI, in particular, is a critical factor in mortgage approvals. Lenders consider two types of DTIs:
Front-end DTI: Your monthly mortgage payment, including principal, interest, taxes, insurance and association fees divided by your monthly income
Back-end DTI: The sum of all your monthly debt payments divided by your monthly income
Depending on the amount of the loan payment, your back-end DTI could increase to a percentage that the lender is unwilling to accept. If your credit score is right above the minimum to qualify for a mortgage, a hard inquiry that results from applying for a personal loan could drop it to a point that makes you ineligible. Either way, there’s a chance you’ll be forced to walk away from the deal.

It’s not always smooth sailing when going from the mortgage application process to the closing table. However, there are actions you can steer clear of to minimize roadblocks and ensure your loan closes on time. You also should review your credit report, scores and identify ways to optimize your financial health to give yourself the best chance at securing a mortgage with competitive terms. And definitely give us a call if you’re in your closing and not sure 🙂

Finding Your Perfect Spot: What to Look for in a new Neighborhood

You may have noticed more people moving to new areas lately – sometimes across the country, sometimes across town, either way here are ten things to look for when considering a new neighborhood.
1. Property Taxes – you should look at property taxes and also how much they’ve increased in the last five years and if any increases are planned. It’s a good idea to build this into your budget too.
2. Amenities – check what’s nearby based on your interests, restaurants, groceries stores, houses of worship etc.
3. Future development – it’s a good idea to check and see what future development is planned – it might be a good or bad thing but either way its worth checking.
4. Crime rates – you can check local crime rates online or even contact the local police department to get a better feel.
5. See the area for yourself – its best to hang around the area especially at different times of the day to get a feel for what its really like.
6. Commute times – you probably already thought about this but make sure to check the times during rush hour too.
7. Schools – if you have kids, you already thought about this. But good schools can also be a good sign of a well-kept neighborhood.
8. Housing Values – check the current values and compare them with five and 10 years ago.
9. Walkability and activities – depending on your tastes see what activities are nearby.
10. Personal Fit – everyone has different tastes so try to match the neighborhood with yours – new or old, tight-knit or independent, quiet or bustle, these are individual fits but finding the right one will help you enjoy your home that much more! And of course reach out to us with questions and if you haven’t gotten pre-qualified yet make sure you do 🙂

Getting Financial Fit For Your First Mortgage

If you are thinking about buying your first house, you probably have a lot of questions. Common ones are: how much can I afford, can I get approved, etc. It’s also a good idea to organize and try to optimize your finances. However, even if you’re starting with modest resources, you can still set yourself up for mortgage success. Here are some tips on where to start.
Recognizing Mortgage Readiness
Before diving into homeownership, it’s essential to know if you’re genuinely prepared for this commitment. According to a Freddie Mac study, the following signs indicate you might be in the right financial position:
• A credit score of 661 or above.
• A debt-to-income ratio (DTI) under 25 percent, focusing on mortgage debt. Including other obligations like student loans, the percentage can be a tad higher.
• A clean financial history without any bankruptcies or foreclosures in the last seven years.
• No overdue debt payments surpassing 90 days.
Your credit score plays a pivotal role. Landing in the 661 and above range boosts your creditworthiness. However, scores between 600-660 signify you’re on the brink, while anything below 599 indicates you might need to reassess your financial readiness.
Although deviations from these benchmarks don’t disqualify you from getting a mortgage, they might mean you’re overextending yourself or jeopardizing other financial aspirations.
Boosting Your Financial Standing
When considering you for a mortgage, lenders dissect your financial landscape — from credit scores to employment history. To enhance your mortgage approval chances, consider the following:
Monitor Your Credit: Begin by accessing your free credit reports from all three bureaus – Equifax, Experian, and TransUnion. They are available weekly on until the close of 2023. Rectify any discrepancies and understand the areas demanding improvement. Remember, most mortgages necessitate a minimum 620 score, but achieving a 740 or higher ensures the best interest rates.
Manage Your Debt: Ensuring on-time payments is crucial. If this has been a challenge, now is the moment to negotiate with creditors for a feasible solution. Lessen your debt through strategies like the debt avalanche, debt snowball, or consider debt consolidation. An optimal DTI ratio is often below 45 percent, although the specific percentage can vary by lender. Also, be wary of new loans which might spike your debt or adversely affect your credit score.
Prioritize Savings: Set aside funds not only for the down payment and closing costs but also for additional expenses like furniture or repairs. On average, the down payment in the first quarter of 2023 was $26,250. Although first-time buyers often deposit 6-7 percent of the purchase price, some loans only demand 3 percent down. Closing costs, too, can vary based on the location. Regardless of the exact amount, start saving with steps like automating your savings or reducing discretionary expenses. And fill out our online analyzer or schedule a meeting on our website and we can develop a customized plan for you.

Market Watch – Inflation and The Housing Marketing

This week we saw the release of Consumer Price Index (CPI) for June 2023, which recorded a rise of 0.2 percent, a slight increase from May’s 0.1 percent, according to the U.S. Bureau of Labor Statistics. Year-over-year, the all-items index experienced a 3.0 percent hike, a decrease from May’s 4.0 percent, indicating a sustained deceleration in inflation for the past 12 months. With the inflation rate now standing just one percentage point above the Federal Open Market Committee’s 2 percent goal, the inflation scenario, particularly its impact on the housing market, demands a closer look.
The slowing of inflation, however, does not translate equally into the housing sector. The Bureau’s data highlight the ‘shelter’ category, encompassing housing costs, as the most significant contributor to the CPI’s all-items increase. However, he also hints at potential stabilization in rents and home prices, a necessary step in addressing the critical issue of housing affordability in the nation.
Encouraging data from CoreLogic suggest a slowdown in the home price growth rate, while Fannie Mae’s Home Purchase Sentiment Index shows a meager increase, pointing to a potentially less heated market. However, with current high mortgage rates, potential home buyers might still hesitate. Lawrence Yun, Chief Economist at the National Association of Realtors, offers some optimism, “Low inflation means low mortgage rates. Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.”
If you are considering making a move, schedule a consultation with us on our website and we can recommend options based on your unique needs.