Changes Ahead for Home Mortgages
1. Rising interest in rates – The Federal Reserve has been buying bonds, supporting low interest rates, in an effort to bolster the economy. But with the economy slowly improving, so the Fed’s actions seem likely to end before long. This summer, rates jumped. Now they are hovering around 4.5 percent and are expected to rise further as the economy picks up and the Fed withdraws its support. Each increase of half a percentage point adds about $25 to $30 a month to the payment for a $100,000 mortgage. HSH estimates that rising mortgage rates plus rising home prices have pushed the typical mortgage payment about 25 percent higher.
2. Rising in fees – Guarantee fees are smallish government fees built into your loan, usually added to the interest rate. “You don’t see it directly,” says Michael Kitces, director of research at Pinnacle Advisory Group, based in Columbia, Md. G-fees pay for risk and the cost of selling your loan to investors. But they also have become a mini-ATM and policy tool for Uncle Sam. Congress hiked G-fees to cover a payroll tax cut in 2012. The federal government also raised G-fees to help repay taxpayers for bailing out Fannie Mae and Freddie Mac. The Federal Housing Finance Agency is raising G-fees again on government-backed mortgages, to raise the cost of government-backed mortgage investments so private lenders can better compete.
3. FHA’s biggest loans are shrinking – Your borrowing power is limited if you’re using a Federal Housing Administration- insured mortgage. FHA’s limit for a single-family home loan is $271,050 in most areas. Certain pricey counties — for example in California, the New York City region and other parts of the East — have limits of up to $729,750. (In Alaska, Hawaii, Guam and the Virgin Islands, the limits are even higher.) The top limits are extra large right now because, in 2008, Congress wanted to boost the housing market by helping more borrowers qualify. The extra-high limits expire at the end of this year. If Congress doesn’t act, the biggest mortgage you can get will drop to $625,500. (See FHA limits in your county here; use FHA’s calculator to see how much you might qualify to borrow.)
4. Lower debt-to-income levels – After Jan. 1, most borrowers will be rejected for a mortgage if their total monthly debts add up to more than 43 percent of their gross monthly income.
Currently, some lenders, although not most, write mortgages for borrowers whom they feel are good risks, even if they do have more debt. “You probably do have lenders today who will approve borrowers with a debt-to-income ratio of 50 percent,” Hollensteiner says. “I think we will see a drop in mortgage approvals for borrowers who have higher levels of debt.”
5. Jumbo loans are growing in popularity – So-called jumbo mortgages — loans too big to qualify for government support — are suddenly hot. Jumbos— mortgages of more than $417,000 in most of the country and more than $625,500 in expensive areas — are usually more expensive. But in an interesting twist, since summer, the rates on jumbos have been more competitive.
6. Fewer 30-year mortgages – Shrinking the federal government’s participation in the mortgage market, as many in Congress would like, could change the types of home loans we use. Without government support, lenders could raise rates on long-term fixed-rate mortgages, which Americans are used to buying relatively cheaply. If long-term commitments look riskier to banks, they might promote adjustable-rate home mortgages over fixed loans by pricing them less attractively, says Kitces, of Pinnacle Advisory Group.
7. More rules to come – The changes aren’t over. There are more new rules to come, although most will be less dramatic than those taking effect Jan. 1. The Dodd Frank Act, which requires the changes, includes about 1,000 rules in all, and 150 of them directly affect mortgages, says Stevens, of the MBA. Only six of those 150 mortgage rules have been decided on so far.
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