Mortgage Rate Drops Below 4%

Last week, Freddie Mac reported an interest rate on a 30-year, fixed rate mortgage of 3.97%, representing the lowest level since June 20, 2013. This results from a number of factors. Interest rates typically move alongside the 10-year Treasury note, which reached a low of 1.86% last week. This is the first time that the yield has been below 2% since May 2013. Many investors prefer the safety of U.S. Treasury bonds given concerns about the economic weakness in Europe, Ebola, and geopolitical turmoil worldwide (such as the threat of the Islamic State militia group in the Middle East). This contrasts expectations of rising interest rates resulting from the Federal Reserve pulling back its economic stimulus of buying bonds and mortgage-backed securities.

Many homeowners have seized this opportunity to refinance. Bank of America reports that a .5% decrease in mortgage rates for a home worth $221,000 should result in savings of $50 per month. However, the Associated Press argues that mortgage rates should not solely dictate the decision to refinance, because doing so is costly. For example, it would cost approximately $2,500 in fees to refinance from a 5.5% to 4% mortgage rate on a $200,000 mortgage, taking roughly 14 months to break even.

Mortgage Demand Dropping - Find Out Why

Fixed-rate mortgages continue to decline rather than increase, which was expected of the second half of 2014. Last week, they reached the lowest average of the year, as reported by Freddie Mac. For the week ending August 21, the average 30-year fixed-rate mortgage was 4.10 percent (down from 4.58 this time last year and 4.12 percent last week), while the average 15-year fixed-rate mortgage was 3.26 percent (down from 3.60 percent this time last year and 3.24 percent last week). Freddie Mac predicts new and refinance mortgage origination volume this year to be the lowest since 2000, at approximately $1.15 trillion.

 So why has mortgage origination declined? Freddie Mac analysts identify three reasons:

1. The refinancing boom is over. The number of home refinances has fallen 60% from 2013 to 2014 and is expected to decrease another 50 percent from 2014 to 2015. Mortgage rates are expected to rise soon, discouraging borrowers from refinancing.
2. Home sales are low. Compared to the first half of 2013, home sales have fallen roughly 5 percent in the first six months of this year. Reasons include slower economic growth, a phase of higher mortgage rates, a harsh winter, minimum new home construction, and limited inventory.
3. More buyers are using cash. Although the number of buyers paying in cash is expected to decrease alongside the number of distressed homes on the market, all-cash home sales rose from 31 to 33 percent in the first six months of 2014.

Whatever the reason, now is the time to take advantage of lower borrowing costs before they inevitably rise!

MHA Program for Distressed Homeowners Extended

The Making Home Affordable (MHA) program was introduced by the U.S. Department of the Treasury in April 2009 and has recently been extended through December 31, 2016. Broadly, the program aids homeowners who struggle to pay their mortgage payments and who lack the equity to refinance. The MHA program includes the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), among other options.

HARP allows homeowners with loans guaranteed or owned by Fannie Mae and Freddie Mac who are underwater on their loans to refinance into mortgages with lower interest rates. Through HARP, over 3.1 million homeowners have refinanced their loans. Nearly a quarter of all refinances were part of the HARP program in the first quarter of 2014.

HAMP is designed to aid homeowners who can no longer afford their home loan payments and took out a loan before January 1, 2009 that is owned, insured, or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Upon showing evidence of financial hardship and on-time loan payments during a trial period, HAMP has enabled over 1.3 million homeowners to permanently modify their mortgage loans. Homeowners save roughly a third of their monthly mortgage payments, or $544.

Both HARP and HAMP work to reduce the number of foreclosures, which fell to the lowest level since 2005 in May 2014. Recently, military resources for military homeowners and families who are permanently displaced by a job-related move have been incorporated into the MHA program.

Put Zero Down on Your New Home

While the main sources of home-loan money, Fannie Mae and Freddie Mac, require a down payment before they fund a loan, they are not the only sources available. The Navy Federal Credit Union is a federally chartered credit union that offers a zero-down payment program for borrowers.

The Navy Federal Credit Union is the nation's largest credit union and consists of 4 million members. It offers a zero down payment option for qualified buyers, and does not require mortgage insurane. Loans are usually around $200,000, although the maximum is $1 million. This often benefits first-time homebuyers, who are credit worthy but lack the cash for a down payment. Delinquencies are well under 1 percent, suggesting that down payments are just a part of the home-loan financing process. The importance of smart underwriting and good servicing is not to be overlooked.