With prices up and home sales up, and current 30 year rates still below 4.0 percent (currently 3.875 percent, 3.932 percent APR), this is an excellent time to buy or refinance a home in Central Oregon. Is the Fed getting closer to raising rates? Probably, but it all is data dependent.
For one reason, the creation of almost 300,000 jobs per month over the past six months has encouraged them to watch this closely. Bad news was good news recently for any rate increase, however, with the latest jobs report of only 126,000 in March.
While the Fed removed the word patient from their guidance, at the same time they indicated they wouldn’t be impatient. What does all this mean? It means the Fed will be watching all the factors that affect inflation, not just one unusual month of low job growth. Other factors such as the bad weather we experienced in February, as well as layoffs in the energy sector, and the strengthening dollar are all having an effect. When and if they do raise rates, it will be gradual. However, as the economy recovers, I think we all agree that rates will rise and probably this year. How will this affect me?
Even a small increase in the interest rates has a long term effect on the cost of your loan. As I reported the same time last year, for example, the 30 year fixed rates were 4.25 percent (4.430 percent APR). On a $300,000 loan the difference of this 3/8 percent over a 5 year period would save you $6,000 in interest (assuming the same payment). For someone staying in their home more than five years, it is definitely a benefit to buy or refinance now!
On the loan front, loan requirements are much tighter now and it’s important for the borrower to know that their income and assets will need to be verified. Even large deposits shown on their bank statements will need verification. While rates are very low, it sometimes seems frustrating to go through today’s loan process.
That is why using an experienced mortgage broker to guide you through the process is very helpful and will even cost you less. Remember, lenders have much stricter guidelines to follow as a result of the Dodd-Frank Act, which took effect on January 10, 2014.
Other restrictions have also been put I place this year that affect vacation rentals that you need to know. The Borrower’s Ability to Repay their loan (ATR), especially for a Qualified Mortgage (QM) has become a critical factor in approving the loan. Lenders are now responsible for proving the Borrowers ATR. The tips below will give you some guidance.
5 KEY TIPS FOR HOME LOANFINANCING
• First, for the best rate and terms, you should seek an 80 percent or lower loan.
• Second, you’ll need to prove your regular monthly income. If you’re a salaried employee, i.e. W-2 employee, all you’ll need your most recent 30 days paystub, showing YTD income, plus 2014 W-2s. If you’re self-employed, you’ll need your last 2 years tax returns. Tax returns will be verified.
• Third, you’ll need to prove your ability to repay. This means the ratio of your gross monthly income to your total monthly debt should not exceed 45 percent. Gross monthly income will be used in the calculation.
• Fourth, the best rate and terms will be for what’s called a rate and term refinance or purchase money loan for a primary or second home.
• Finally, it’s important to have good credit and reserves. A FICO or credit score of 740 or higher will get you the best loan terms. Lenders will also require six months reserves if you have any rental properties.
MORTGAGE LOAN NEWS
A 30 year fixed rate is the best product today, with rate increases on the horizon. Higher growth in employment will probably nudge rates higher later this year.
Every month the employment report is very, very important. The creation of jobs not only tells us how the economy is performing, the report also tells us how the economy will be performing in the future. When we create a significant number of jobs, we know that these jobs will create more jobs because those who have become employed will spend more money on a variety of goods.
This week, we feel that the March employment report is even more important than usual. Why? For one, after the creation of almost 300,000 jobs per month over the past six months, we know that the Federal Reserve Board is getting closer to raising short-term interest rates. Any number close to 300,000 this month may move the Fed to a tipping point. In their most recent meeting the Fed removed the word patience from their guidance but at the same time, indicated that they will not be “impatient.”
Secondly, we are looking at another number besides the number of jobs created. We are looking at those who have removed themselves from the labor force as a result of the recession. If some of these folks start coming back into the labor force, the unemployment rate could increase or at least stay the same even with a significant number of jobs created. If the economy produces a plethora of jobs and the unemployment number stays steady or rises, this would actually be good news. It means that our economic recovery is finally starting to reach mainstream America. The low labor force participation rate is one reason the Fed has been able to hold off raising rates for so long into the recovery. It is also one reason that wages have not risen as jobs have been created. Hopefully, this will soon change.
With all the buildup we gave the March unemployment report, the next question is…how was it? Was it really as important a release as we have described? Generally, the jobs data is very important, but this report had the potential for real impact coming on the heels of six months of strong jobs data and being released two weeks after the Federal Reserve Board’s Open Market Committee considered how quickly they should raise short-term interest rates.
The result was good news with regard to the upcoming rise in interest rates in the form of bad news from the labor sector. The increase of 126,000 jobs was just about half of what was predicted by economist ahead of time. In addition, the previous two months of data were revised down by almost 70,000 jobs. The unemployment rate remained steady at 5.5 percent. In response to the weak report, market analysts seem to be pointing their fingers at the bad weather we experienced in February, as well as layoffs in the energy sector, by way of explanation.
We will note that one soft month does not indicate a trend, especially during a rough winter month and with data that is often revised the following month. But the results will give the Fed some hesitation. What could save us from an imminent rate hike even if this report was a one month anomaly? A strong dollar and low oil prices both lower the threat of inflation. In addition, wage inflation, which remains muted for now, is as important as the number of jobs we create. The key is inflation, or more precisely, the lack of it.
Robert W. Browne, CEO
R.B. Financial Services, Inc.
500 Highland Meadow Loop, Redmond
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