All day, every day, conforming and FHA mortgage rates in North Carolina are changing.  Rates move in response to hundreds of factors as mortgage backed bonds are traded on Wall Street.

Among the biggest influences on mortgage rates is the threat of inflation.  When traders expect future inflation, they will sell low yielding mortgage bonds in order to protect their investors.  If inflation is tame, like it is now, mortgage bond prices will rise, and interest rates will fall.

What is inflation, exactly?  Most people think inflation means ‘stuff’ costs more.

By definition, inflation is when a currency loses its value; when what used to cost $1.00 now costs $1.10. inflation really means that a dollar buys less.

As consumers, we recognize inflation by the items we buy on a daily basis becoming more expensive.  However, it’s not that goods are more expensive — it’s that the dollars we’re using to buy them have become worth less.

With mortgage bonds, the holder of that bond will get the principle and interest back with dollars that can’t buy as much anymore.  If an investor expects this, they would want more interest paid to compensate them.

Mortgage rates move opposite of bond prices, as inflation takes hold, mortgage rates rise as the bond prices fall.

Lately, inflation has been exceptionally low. The Federal Reserve acknowledged as much in its last statement to the markets, and available data backs that position.  This, after predictions that inflation would be “runaway” in 2010.

There is not much threat of inflation right now in the economy, so for a while at least, you can expect rates to stay lower, until the traders start to fear inflation in the future – when that happens, rates could shoot higher.

Today, in its first meeting in 5 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.

The Fed Fund Rate remains within its target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since April, “the economic recovery is proceeding” and that the jobs market “is improving gradually”. Business spending “has risen significantly”, too, with the exception of commercial real estate.

Today’s statement is the 8th straight press release in which the Fed shows optimism for the U.S. economy, dating back to June 2009. Since that time, the Fed has terminated all of the programs it created to support the economy through the economic crisis.

And, although the Fed’s statement acknowledged economic growth, it did highlight lingering threats, too.

1. Employers are still reluctant to hire new workers
2. European debt concerns could spill-over to the U.S.
3. Bank lending is contracting

Also, as expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”, citing that “inflation has trended lower” recently.

Mortgage market reaction has been positive thus far. Mortgage rates in North Carolina are slightly improved post-FOMC.

The FOMC’s next scheduled meeting is August 10, 2010.

I got two funny phone calls today from Charlotte Real Estate Agents, both asking about down payments.  Since the mortgage crisis started three years ago, the biggest mis-information in the media has been concerning down-payments, with most news articles saying you need 25% or more for a down payment.

The first call went like this:

Caller: “Hi, I have a client who needs 100% financing?”

Me: “Are you a Real Estate Agent, and is your Client a Veteran, or buying a Rural Property?”

Caller: “I am a Realtor, and no, my Client is not a veteran and wants to buy a house in Charlotte”

Me: “Uh, sorry to break the news to you, but, you don’t have a ‘Client’, you have a renter that is saving money for a down payment”.

Next call, 10 minutes later:

Caller: “Hey, I have some clients looking to buy a home with a Jumbo Mortgage.  The  Seller works for a bank and told us the North Carolina passed a law that made it illegal to do a Jumbo Mortgage with less than 20% down.”

Me:  “Well, then, tell the seller to call the cops on me – I just closed a Jumbo loan last week without 20% down.”

Two extremes ends of the market, but both Real Estate Agents were fed bad information that was causing them to pass on bad advice.  Here is a basic guide to minimum down payments:

0% Down:  VA Loans are available for qualified Veterans through Guaranteed VA Loans.  In Charlotte, you can borrow up to $417,000 with no money down.

USDA Rural Housing Loans are available in qualified areas and for borrowers earning less than the maximum income amounts.

3.5% Down:  FHA Insured Mortgages are available for loans up to $303,750 in the Charlotte area, and in the outlying areas, they may be capped at $271,050.

5% Down:  With Private Mortgage Insurance (PMI), you can put as little as 5% down with a mortgage amount up to $417,000.  With only 5% down, you will have some type of Mortgage Insurance.

10% Down:  For loans up to $417,000, you can put down 10% and have Mortgage Insurance available.  Some highly qualified borrowers, buying highly qualified house, may be able to get a second mortgage or home equity line of credit and avoid PMI.  Second Mortgages are much more complicated than PMI, so they aren’t nearly the sure thing they were a few years ago.  However, they will save most home buyers money, so they are worth looking into.

For Homes prices above $438,000, buyers can avoid Jumbo Mortgages and keep the down payment to 10% if they can qualify for a second mortgage.  We do this by getting a FNMA maximum mortgage of 417,000 and a second mortgage for 10% with a 10% down payment.

At higher home prices, while not a law, you may need up to 20% down.  Jumbo mortgages are limited to 80% of the home’s appraised value.  Second mortgages can make up some of the gap, but jumbo mortgage lenders will not allow higher than 80% Loan to Value, and PMI is not available on Jumbo loans.

When you are buying a house, your down payment is the most critical financial decision you will make.  Knowing the minimum required down payment is a good place to start your home shopping

FHA mortgages are very popular with first time home buyers in Charlotte and thorughout the Carolina’s because of the low fixed rates, low down payments, and easier qualifying.

Starting sometime later this year, the monthly cost to carry an FHA-insured mortgage is expected to rise.

In a near-unanimous vote, the House of Representatives gave the FHA power to raise the monthly mortgage insurance premiums it charges to its borrowers.

Currently, monthly mortgage insurance premiums are 0.55% of the unpaid loan balance, divided by 12.  The recently approved Federal Housing Administration Reform Act provides for an increase in monthly premium of up to 1.55 percent, among other details of the bill.

Despite the ability to charge 1.55 percent, FHA officials say an increase to 0.90 percent would be sufficient to self-insure its loans.

In everyday terms, assuming a $200,000 mortgage, the math to a homeowner looks as follows:

• Current Premium (0.55%) : $91.67 monthly mortgage insurance premium
• Expected Increase (0.90%) : $150.00 monthly mortgage insurance premium
• Maximum Increase (1.55%) : $258.33 monthly mortgage insurance premium

Because higher monthly insurance premiums are expected to pad the FHA coffers sufficiently, the FHA has said it plans to reduce its upfront mortgage insurance premium paid at closing from 2.25 percent down to 1.000 percent.

On the same $200,000 mortgage, a move like that would reduces closing costs by $2,500.

The bill awaits companion legislation in Senate and final approval into law, but considering the House’s lopsided vote Thursday, it could happen rather quickly.  If you’re planning to buy or refinance a home using an FHA mortgage, you may find that waiting to take the next step could be a costly one, long-term.

From a home affordability standpoint, higher Up-Front Mortgage Insurance results in a lower payment, so it’s easier for most home buyers to qualify currently.  The new, higher monthly mortgage insurance will result in higher Debt to come ratios for buyers, and make houses less affordable.

Last week’s jobs report, and the continuing financial woes in Europe, are keeping mortgage rates low in Charlotte and throughout the US.

On Friday, after the weak Employment Report, mortgage rates fell to their lowest level on 2010.

When rates eventually go back up, it will happen quick.  It could be this weeks $70 Billion in new treasury debt, so some surprise news from Wall Street that causes it, but something will cause rates to jump and they will jump quickly.  Rates always fall slowly, and rise quickly.

The issues in Europe won’t end this week, so we may see low interest rates all summer.

However, if you are still sitting on the fence about refinancing or buying, (I know you are out there – less than half of the mortgages over 6% have refinanced in the past year) don’t wait too long to get started.  Missed opportunity brings regrets.

Home Loans are not difficult to get – if you meet the basic criteria.  Commercial loans and business loans continue to be tough to get.  Every lender in the country will look at your credit score, documented income, and your savings.  If those things meet the criteria, refinancing or buying a home now is pretty simple when you work with a mortgage professional.

Mortgage markets worsened last week as concerned of a global debt crisis lessened and stock markets rebounded. The gains in stocks came at the expense of bonds — including mortgage bonds.

Conforming and FHA mortgage rates rose in North Carolina for the first time in 5 weeks, pulling mortgage pricing off its best levels of the year.

This week, mortgage rates are likely to rise some more, but still remain at the ‘historically low’ level that every mortgage marketer is screaming about.

The big deal this week in the monthly Jobs Report.  This comes out the first friday of every month and is usually a big contributor to volatile rates – and usually makes rates worse after periods of low rates.

In April, an estimated 290,000 jobs were created and, in May, economists think more than a half-million people re-entered the workforce.  This is good for the economy, of course, but can drag on mortgage rates.  If job growth even comes close to the 500,000 marker, mortgage rates could zoom higher.

Mortgage rates moved higher last week but are still very low. If you’ve been thinking about refinancing your mortgage, you haven’t missed the window – but don’t wait for rates to get lower – they most likely won’t.

Fannie Mae, the government run entity that drives the mortgage industry guidelines is rolling out tougher standards for Interest Only and Adjustable Rate Mortgages.

Fannie Mae made its official announcement April 30, 2010.  The changes will roll out to home buyers and homeowners in Charlotte and everywhere else over the next 12 weeks.

For ARMs with fixed terms of 5 years or less, lenders must now qualify the borrower as if the interest rate on the loan is 2% higher than the real rate. As an example, if the 5 year ARM rate is at 4%, the borrower must qualify as if the rate is 6%.  This may make the 5 year ARM, currently a very affordable product for the right home owner, unaffordable for some people.

Interest only mortgages guidelines are really toughening up:

1. The borrower’s FICO must be 720 or higher
2. Borrower must have 2 years of mortgage payments ‘In Reserve’
3. The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.
4. The home must be a 1-unit property (No Duplexes)
5. The home must be a primary residence, or vacation home (Can’t be an investment property)

The 2 years of mortgage payments ‘ in reserve’ means enough money has to be in a borrower’s account at time of closing to make two full years of mortgage payments.

The Fannie announcement does say that this change with Interest Only ARMs is to make sure people use this program as a “financial management tool, rather than as an affordability tool”.

That last statement is  a key point in Fannie’s decision – Interest Only and Adjustable Rate Mortgages are simply Tools.  These loan programs can be used by craftsmen to build financial masterpieces, or by amateurs to destroy.  The power is in the proper use of the tool, and using your mortgage program as an integrated part of an overall home ownership and financial plan.

Interest Only and ARM mortgages allow homeowners to store their money in other places, such as retirement or college savings accounts when used correctly.  Used wrongly, they are for buying too much house, spending too much money, and getting into trouble financially.

If you have, or are considering an interest only or ARM mortgage, let’s create a home ownership plan for you that uses the tool correctly to help you succeed financially.

Your first economic priority needs to be liquid cash.

There are two reasons to have  a ready stash: something good happens or something bad happens.

Good things that require cash:

• Your child is accepted to a terrific (but more expensive than planned) school
• You have an opportunity to invest in a vehicle that will enable you to reach the Financial Freedom Point faster than you planned on.
  
• You get to start your own business
• You get offered a ‘once in a lifetime oportunity’ and need to pay for it

Bad things that require cash:

• Job loss or falling income
• Medical procedures
• An elderly parent in failing health
• Home repairs

A recent Urban Institute study on workers aged 45-79 is troubling:

• Average wages for retirees from long-term jobs (with more than 10 years of service) who continued to work declined by about 39 percent
• Median wages plunged by 53 percent
• Older people displaced from long-term jobs who found other employment experienced average wage losses of about 19 percent

This study shows that we can no longer assume wages and income will always increase or always be there.  Having some cash available can make the difference when life happens – will a setback be a bump in the road or a cliff?

Too many people have too little cash in the bank – blindly hoping that nothing bad ever happens, or if t does, the credit cards, home equity lines, or government stimulus programs will bail them out.

Set a goal for yourself and your family to build to at least $10,000 in liquid savings and then grow it from there. If you are at a big company that has to lay people off to make their quarterly numbers, or if you are in an industry that is struggling right now, you will want even more cash available to you.

In my “Start with the House” philosophy, I place liquid cash at a higher priority than buying a house, paying off credit cards, or saving for retirement.  Having sound priorities for your money will make it more likely that you will succeed financially. 

With all the government spending, a lot of people are rightly concerned about future inflation.  The timing of when inflation from printing more US Dollars hit is the big question.  At some point, the dollar will become worth less than the goods and services that people need to buy, and prices will start to increase.

If you’re trying to predict whether mortgage interest rates will be rising or falling, one key to watch for is “inflation”.  Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that thinks cost more, it ‘s that the dollar, or currency to buy it is worth less. Think of the baker who says, “You want to trade me those dollars for my bread?”  Your dollars have to be worth something to him in order to make the trade (sale).

As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  (“You want to buy my mortgage bond with those dollars”)  Mortgage rates move opposite of bond prices, so when bond prices rise, rate drop.

In terms of Wealth Creation, in times of inflation you want to own “things” that are perceived as more valuable than plain old paper dollars, and it’s also a good time to owe money that was used to buy things – you will buy ‘things’ when they are cheap (your dollar buys more) and pay back the lender with inflated dollars that won’t buy as much anymore.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of home ownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Charlotte home may be as good as it gets.