OK, so you are thinking of putting off buying a home. WHY? Here are some changes coming to mortgages that may make you think twice.
FHA Mortgages – Starting April 18th, 2011, the monthly mortgage insurance premium will be INCREASING .25%. What does this mean? Currently, on a $100,000 loan, you pay approximately $75 per month for the insurance policy provided by HUD which insures the lender in case of your default on the loan. This policy is required, and you bear the cost. As of April 18th, this will be increasing to 1.15%, or $92 on a $100,000 mortgage. That is $17 per month. No big deal? Maybe, maybe not, but in today’s real estate environment, that is equal to about $5,000 in sale price. On a $200,000 mortgage, it will cost $42 more per month. Now we are up to $9,000 in sale price.
Conventional Loans – Majority of conventional loans are currently sold to the secondary mortgage market, otherwise known as Fannie Mae and Freddie Mac. These institutions package up mortgages into bundles and turn them into securities for investors to purchase. They then turn the investors money back into money to lend to borrowers. They have underwriting guidelines that allow you to borrower up to 95% of the value of the property up to a conforming loan limit of $417,000 currently. This allows lenders to sell their loans on the secondary mortgage market and use the money from Fannie and Freddie. Without this, the banks would be required to loan their own funds from depositors, such as savings accounts and CD’s. Obviously, they are much more careful to lend their own funds, making them require a higher rate of return (higher interest rate) and more strict guidelines. This is similar to loans currently over the conforming limit of $417,000, also referred to as non-conforming loan or Jumbo loans.
Here in lies the rub. The Obama administration is planning on phasing out Fannie Mae and Freddie Mac over the next few years. They will start by reducing the conforming loan limit, slowly but surely down to $0, tightening up guidelines and eventually do away with Fannie and Freddie. This leaves only the big banks to do loans as the little guys will not have any funds to lend without them! They will be out of business which will reduce competition in the open market and in turn, cauising higher costs and rates. Second to that, the big banks will be lending their own money, thier portfolio. This will require more money down to purchase a home along with higher interest rates. If you were around to obtain a mortgage in the 1980’s, or know of someone who was, it will be very similar to that. Minimum 10% down, higher rates, more closing costs, etc.
So, if you are thinking about waiting to buy a home, you will need more money, pay more in fees, with a higher interest rate. Property values are stable and will be slowly but surely increasing. The fence you are sitting on has barbed wire on it and is on fire…GET OFF!