Bulls & Blogs

If you're in the market for a new home or thinking about refinancing, I have one question for you: What are you waiting for? I'm talking to those of you who are waiting for interest rates to get better. Interest rates are at historic lows, and sitting on the fence may cost you money.

Okay, I'm a mortgage professional, so I admit I have a vested interest in you making a decision. However, if you're really going to purchase a home or refinance, it matters not to me whether you act now or act later. (I would like to do business with you either way.) However, it should matter to you. Acting now may save you money.

Buying

Let's suppose you're thinking about buying a home. The home's price is $200,000, and you're prepared to put down $10,000 towards the purchase. Today's 30-year conforming rate is 4.75%, which equates to a $991 mortgage payment. If you're paying $1300 in rent each month, your "housing" payment would be $309 dollars less if you buy now.

You may have heard that the Federal government is considering incentives that might drop rates to 4.5%. Does it make sense for you to wait?

Consider this. Any program the government offers is probably 3 to 6 months out. (Let's use 6 months as we're talking government time.) If you buy now, in 6 months, you will have saved $1854 on your housing payment. Yes, if you wait for that 4.5% rate, you can lower your monthly payment by another $30, but:

- If you find a home you like that's priced right, is it worth the risk losing it?

- What if rates don't drop?

- How long will it take to recoup that $1854 you could have saved?

You are correct to point out that I haven't considered property taxes and insurance, which will reduce your savings. But I also didn't consider the tax benefits of owning. On balance, if you buy now and live in the home for 7 years, I calculate you will save over $27,000 by buying over renting. (Please check with you tax professional about the tax benefits of home ownership.)

Refinancing

Suppose you're already a homeowner, and you're thinking about refinancing. Should you refinance today or gamble 6 months for that 4.5% rate?

Let's say your loan balance is $200,000 with an interest rate of 6.25% - a pretty good rate last year. If you refinance today, your monthly mortgage payment would drop from $1231 to $1043 - a $188 savings each month. If you wait for 4.5%, your monthly payment would be $1013. Here's the question:

In 6 months, you will have saved $1128 if you refinance today. If you wait 6 months to get that 4.5% rate (and remember, there's no guarantee rates will drop), it will take 38 months - more than 3 years - before you recoup that $1128. (I'm assuming you have sufficient equity in your home to refinance.) Which makes more sense to you?

Of course, these are only examples, and in both cases I'm assuming you qualify for the loan. The point I want to make is that waiting involves risk AND cost. Rates are really low today. While they may get lower, they also may get higher. If you're ready to act now and decide to wait, you're not only risking today's really low rate, but you're also giving up guaranteed savings.

(You can run your own examples using the calculators on our Web site, www.LoneStarLending.com. Just click the "Calculate Payment" button in the left margin.)

If you're addicted to cable news as I am, you can't help but worry about the credit crisis gripping the world. I keep wondering how and when it's going to affect me personally. Currently, I'm not seeking credit, but what if I was? I hear the stories about car dealerships unable to make auto loans, home equity lines being cut off, and credit card limits being cut back. But you'll notice I didn't mention mortgages. That's because mortgage credit is the one segment of the financial market that remains relatively healthy. That was not a typo. Yes, you still can get a mortgage.

That may sound like an outrageous statement given what you're hearing on the news. This credit crisis began because of bad mortgages. The Wall Street boys sliced, diced, packaged, and collateralized those bad mortgages and went belly-up. Fannie Mae and Freddie Mac overindulged on those bad mortgages and were nationalized. How can the words "mortgage" and "healthy" appear in the same sentence?

Well, it's because of the Federal government's involvement that it can. Back in the good ol' days (before 2007), Fannie and Freddie represented only part, albeit a large part, of the secondary mortgage market. (The secondary market is where loans are packaged and sold to investors. In effect, it makes money available for more mortgages.) Wall Street also had a large share, and the government had a rather small share through FHA, VA, and USDA guaranteed/insured loans.

Fast forward to this year. Investors lost interest in mortgage investments, which put Wall Street out of the business. That meant a large part of the secondary market was gone (but this part was dominated by the exotic and sub-prime loan programs that were falling out of favor.) Loan originations plunged, in part because of the disappearance of these programs but also because mortgage insurance companies dramatically tightened the terms of loans they were willing to insure. Confidence in Fannie and Freddie started to wane, and investors began to question the strength of their guarantees. Both began to report capitalization problems, and questions arose about whether they would be able to continue buying new mortgages.

In steps the Federal government. First, it's rather small share of the mortgage market started to balloon. The FHA loan became the program of choice for those with marginal credit. FHA loans represented almost 30% of the total mortgage market in July, up from less than 6% just three years ago. (FHA's share is probably larger than it should be. Folks with good credit and down payment money get better terms with non-FHA loan programs, but they're being steered to FHA.)

Second, the government nationalized Fannie and Freddie. Suddenly, that implicit backing from the Federal Treasury became explicit, and the risk associated with their bonds disappeared. (In fact, the day after the nationalization, mortgage rates dropped by more than half a point.) Not only that, but the government made capital injections into both companies and promised further injections going forward. The government's goal was to insure that both companies had plenty of cash to buy mortgages.

The net effect is that virtually the entire mortgage market is controlled by the Federal government, and the government is determined to do what it can to prevent further deterioration in housing.

Lenders are making mortgages, and you probably can qualify.

So if you're considering a home purchase, what should you do? I suggest you consider these facts.

a. Housing prices are down - some even say affordable. There are even some bargains out there.

b. Mortgage rates are low. The question is will they remain low. Once this crisis ends, rates most likely will rise, especially after the government divests itself of Fannie and Freddie.

Can you qualify?

Did you ever hear the radio ad that said "Got a job, get a car?" Well, there's some truth to that right now in the mortgage market. While easy credit is gone, if you have a steady job, decent credit, and a little savings, you should qualify. But what are decent credit and a little savings? If you have avoided bankruptcy, foreclosure, and repossession for the last few years, you probably have decent credit. The FHA and Fannie/Freddie loan programs require 3% down payment, but VA and USDA loan programs still require no down payment.

Finally, how might the economic rescue bill affect housing? Should you wait?

I am confident the government will modify many of the mortgages it purchases through the rescue bill due to political pressure. In the short term, this may put slight downward pressure on home prices because mortgage investors will be forced to acknowledge lower property values to participate in loan modifications. (Their alternative is foreclosure, which can be time consuming and expensive, and I suspect that same political pressure will block or lengthen foreclosure proceedings.) Loan modifications mean fewer foreclosures. Foreclosures tend to drive home prices down. Fewer foreclosures means more stable prices and should help the market find its floor more quickly. I would argue that if you find the home you want, and it's priced right, now is the time to buy.