HawaiiVALoans.com Blog

Where are Interest Rates Headed? 4%, 8%, or Somewhere in Between?

We have recently completed a three week stint where rates increased almost every day.  They have stabilized in the past week and even rebounded slightly, but that recent scare has everyone guessing where rates are headed next.  If you are anything like me, you have been hearing every possible scenario lately.  Of course, no one really knows what the real answer is, but we can do our best to analyze the reasons that each extreme could happen and hopefully define a reasonable expectation.

Let’s look at the rumor that we are all hoping for…will rates go down to 4.00%?  Unfortunately, I don’t think there’s much chance of that happening.  What brought the rates down to the low 4% range several months ago was the announcement and beginning of the Fed’s program of buying mortgages packaged by Fannie Mae and Freddie Mac (the majority of mortgages originated in the U.S.).  They are now about halfway through that program now and there isn’t much room for them to increase the amount of buying they can do.  Last week they announced that they will not be expanding that program.  They can no longer reduce the short term borrowing rates which are already at zero percent.  At today’s rates, the fed remains the largest purchaser of mortgage securities, which means that private investors are not getting the returns they need to balance the perceived risks.  As long as that is the case, the only way rates can go much lower is if the fed increases their buying power.  To do that, they would have to sell even more Treasuries bills than they already are.  Selling more treasuries means more supply and thus lower prices.  Lower Treasury prices means higher Treasury rates and because mortgage rates are always higher in rate than treasury securities (mortgages are more risky), then that would mean higher mortgage rates.  The market had found a balancing point and there simply isn’t enough government cash in the arsenal to buy enough mortgages to drive rates lower.

So…does that mean rates are going to go higher?  Way higher, up to 8%?  Not necessarily in the short term (the next 6-9 months), and I don’t feel comfortable speculating beyond that.  There are two major reasons that could cause interest rates to increase that substantially, inflation or decreased credit quality, and I don’t think either is likely in the near term.  Despite some recent positive economic news which led to a run up in the stock market, the evidence points to a potential stabilization, but we are not yet in a significant recovery.  Without a significant recovery, inflation is not a near-term concern.  In fact, the Fed said on Wednesday, “Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

The other situation that could cause a significant upswing in rates is a decrease in credit quality.  This is precisely what caused the subprime meltdown and deterioration of the mortgage market about two years ago.  However, what is left are loans guaranteed by Fannie Mae, Freddie Mac, HUD and the VA.  All of these are government agencies or quasi-governmental agencies owned and implicitly guaranteed by the federal government.  Despite bad conditions and high foreclosure rates in the housing market, buyers of these mortgage securities issued by these entities are insulated by the guarantees.

What’s left?  Well, since there doesn’t seem to be anything within expectations that could push rates significantly up or down, we should probably remain in the same interest rate range for the next several months.  What will affect rates is the economic reports that come out daily and the future expectations those create.  Consistent news of growth, expansion and profits will shift money out of bonds and into the stock market, which will increase mortgage rates slightly.  Bad news about the economy will help keep rates in the lower end of the range.   Bad news abroad and strengthening of the dollar could help rates, but since the fed is the biggest buyer of mortgages right now and they aren’t going to increase that buying, there is probably more chance rates will drift higher than there is that they will drift downward.

Posted by Gabe Amey. Filed in Interest Rates

$8000 First-Time Homebuyer Tax Credit: 5 Things to Know

Earlier this year Congress & President Obama signed into law the American Recovery and Reinvestment Act of 2009. This bill, enacted to help stimulate the battered economy, included a tax credit of up to $8,000 for First-Time Homebuyers, replacing the old $7,500 tax rebate program.

According to industry reports, first-time homebuyers now account for more than one-half of all home sales. It’s obvious that this tax-credit, as well as historically low interest rates, are providing huge incentives to potential home buyers who were previously sitting on the fence to now make a move. In addition, those who were not interested in buying a home in this market, are seriously reconsidering with these new incentives dangling in their face.

Now before you rush out and start applying for a mortgage loan, here are 5 important things to know about this $8,000 First-Time Homebuyer Tax Credit:

1) Amount of Credit: The tax credit is based on the lower of the two; $8,000 or 10% of the purchase price. In Hawaii, you’ll probably won’t find too many properties for $80K or less so rest assured you should be eligible for the full $8,000 credit.

2) Income Limitations: The value of the tax credit diminishes as the home buyers’ income rises above $75,000 if you file as a single person, or $150,000 if you file as a married couple. Once you hit $95,000 (single person) or $170,000 (married couple), the tax credit phases out completely.

3) Who is Considered a First-time Homebuyer?: As defined by the IRS, anyone who has not owned a “main home” in the last 3 years where “main home” is defined as a home in which a person has lived for most of the time. So if you owned a property in the last 3 years, but it was either an investment property or second home (as long as you have not lived there most of the time), you may still be eligible for this credit.

4) 2009 Buyers Only: The purchase of a “main home” must be made between January 1st, 2009 - December 1st 2009. We still don’t know if congress will make an extension to push this credit into 2010.

5) Recapture: If this property is sold within 3 years, or you cease to use it as your “main home” within 36 months, the IRS will require that you payback the entire $8,000 credit.

Please keep in mind that I am a VA Loan Specialist, and not a tax professional. Although this information is deemed reliable, by all means, always consult your tax professional for expert advice on the tax law.

Posted by Gabe Amey. Filed in Random, Stimulus Package, Tips, VA Purchase

Should I Buy Now or Wait to See If Prices Drop?

This is a question that may have a surprising answer.  Many peoples’ first instinct is to conclude that if prices are falling, it would be smarter to wait for your dream home to decline in price and to buy at a later date and lower price.  However, interest rates play a significant role in the home buying process and should also factor into the decision.

The truth is, interest rates are at historic lows and, as the graph shows, have not been lower in at least 45 years.   The government has pledged to buy mortgages to help keep rates low, and they have done a great job keeping interest rates between 4.50% and 5.00% over the past few months.   However, the government’s help won’t last forever and investors will need the higher returns they’ve demanded in the past.   Without that support, interest rates would likely be significantly higher right now.  With rates so low and the government intervention fully priced into the market, there is a greater likelihood that they will move up not down.

That being said, how much effect would an interest rate increase of 1.00% make?  If you were purchasing a property for $400,000 and interest rates increase from 4.50% to 5.50%, how would that affect your payment?  At 4.50%, with new VA loan and no money down, your payment would be about $2070 per month.  Now, if interest rates increased 1.00%, that same loan would cost you about $2320 per month.  That’s an increase of $250 per month!

Of course, if home prices are declining, the savings from buying the house at a lower price should save you more money, right?  If prices declined 5% in the next year, the price of the home would go from $400,000 down to $380,000.  The mortgage payment at that price is still about $2204 per month at 5.50%.  So, even though the price decreased 5%, your monthly mortgage payment would be almost $135 more per month.  If the prices dropped a full 10%, you would still be paying $20 more per month.  What may be even tougher to comprehend is that if you use a VA loan with 100% financing to purchase the home, you wouldn’t be saving money on the down payment because none is required.

But isn’t an increase of 1.00% in the interest rate a big jump?  It’s true that a 1.00% increase in rate isn’t very likely to happen overnight, but we have seen rate movements of that magnitude several times in the past year alone.

There are other things to consider as well, like how much you are currently paying for rent, the tax benefits of owning a home and other personal factors.  Regardless of the interest rate environment, our advice is to find a payment you are comfortable with and match a house to it.  If the home meets your desires, go for it.   Hawaii is an island with limited real estate and many people who would love to live here.  There are many locals who live away and are waiting in the wings to come back if the prices decline enough.  As long as price is a deterrent for some, it shows that there is no shortage of demand for housing in the islands.  So take a look at what today’s interest rates can allow you to buy and make an informed decision.  Good luck house hunting!

Posted by Jim Owens. Filed in Interest Rates, VA Purchase

Testimonial: Tyler Mata

I had the pleasure of meeting Tyler Mata and his dad Robert at one of our VA Loan Seminars last fall.  What struck me about Tyler was that he was relatively young (early 20’s) and he was already ahead of the game in terms of his finances.  Good job, great credit, little debt and proactive with saving his money.  It’s very refreshing when I get the opportunity to work with young home buyers who have put themselves in a great position to qualify for a mortgage by being disciplined with their money.  After meeting his parents, Valerie & Robert, it was clear to see that he received the proper guidance and support from his family that enabled him to get where his is at today.  I wish all the best for Tyler and his girlfriend, Kristen as they are proud new homeowners thanks to the VA Loan program.

Tyler completed his 3 year service in 2003 and returned home in hopes to start a new life and a dream of one day becoming a homeowner. He worked hard and saved money, but the price of houses just made his dream seem so out of reach. In November of 2008, he decided to see what the VA could offer him by signing up for a VA Loan seminar. This is where he met Gabe Amey (Branch Manager of Hawaii VA Loans.) This was the beginning of his realization that his dream of owning a home was actually reachable.

In December, Tyler began his house hunting and found a house in Mililani on the internet. Being that Gabe had already pre-qualified him, he knew his limitations and had numbers that he could work with when he met with his realtor. He made an appointment to see the house the next day and although the house needed a lot of work, he saw a house with a garage that was one of his personal requirements because he works with cars. He also looked beyond all the work that needed to be done and saw the potential of turning the house into his “home”. He put an offer on the house and then after waiting on pins and needles, he got the good news that his offer was accepted.

Tyler immediately called Gabe and he and his realtor worked together to make the transaction go through as smooth as possible. Needless to say, there were lots of paper work, but Gabe was there every step of the way. There were times when I needed to get answers from him immediately, and he was always reachable. Gabe always made us feel comfortable and no question was too unimportant to ask. With Gabe’s expertise and guidance Tyler signed papers on January 29, and on February 6, 2009, Tyler was given the keys to his new house. Tyler immediately put his valuable skills to work and with the help of family and friends, transformed his house to a “home”.

I finally got the opportunity to meet Gabe at Tyler’s house-warming party this past Saturday and to personally thank him for all his work and support. We are so very proud of our son and it is a wonderful thing to see his dream come true. We have always told him not to give up on his dreams and this proves that dreams DO come true. Thank you so much Gabe, for making this possible. We appreciate all you have done for us. We encourage veterans to take that step and seek the help that is out there and get the ball rolling so that you, too, can become a very proud home owner.

Thank you

Tyler’s mom & dad
Robert & Valerie Mata

Posted by Gabe Amey. Filed in Testimonials

Which Rates are Better: Conforming or Government (VA & FHA)?

“What interest rate can you offer me?”  Ask any mortgage loan officer and they will tell you that this is probably the first and most commonly asked question they get from their customers.  Rightfully so, since the interest rate determines what your mortgage payment will be and, of course, we all want the lowest payment possible.

Now, this is a loaded question because one’s interest rate depends on many factors like down payment, equity in the home, credit score, property type and when you actually lock in the rate (here’s an old post we wrote on what determines mortgage rates).  Another important factor is the type of loan program you are using - a Conforming loan (a mortgage which the meets the underwriting requirements of Fannie Mae or Freddie Mac - and is most likely sold to them) or a Government loan (mortgage guaranteed by the government, most typically an FHA or VA loan).

An important thing to clarify is that Conforming mortgages and Government mortgages have different “base rates”.  You can think of a base rate as the interest rate prior to any “add-ons” or “adjustments” which are added to the rate to account for certain characteristics and/or risk factors of that particular loan.

Traditionally, a Conforming loan base rate will be roughly an eighth to a quarter percent better than a Government loan base rate.  The one big difference is that Government loans do not implement Loan Level Price Adjustments (LLPA’s) like Conforming loans do.  What does this mean for prospective home buyers or homeowners who would like to refinance?  If you don’t have at least a 740 credit score as well as a 25% down payment (or 25% in equity - for a refinance) and you are getting your mortgage through a Conforming loan, your interest rate will be higher than the base rate being advertised.

To illustrate my point, let’s take a look at two potential home buyers who are looking to purchase a condominium.  Now, Mark and VA Joe have the same income, assets and credit score (680) and both will be making a 10% down payment.  The only difference is that Mark is purchasing using a Conforming loan and VA Joe with a VA loan.

As you can see by the illustration above - Mark’s base rate is a quarter percent better than VA Joe’s, but because of the Loan Level Price Adjustments on Conforming loans, there is an add-on for Mark’s credit score as well as property type (condominium).  These adjustments are called “price adjustments” which will either translate into higher closing costs (if Mark wants to keep the base rate) or an increase in the interest rate, as seen in this example.

Here’s the most recent Loan Level Price Adjustment Matrix from Fannie Mae to give you an idea of the different types of risk factors that translate into in increase in interest rate and/or closing costs for a Conforming mortgage.

Bottom line, unless you are buying a Single-Family Dwelling (SFD), have at least a 25% down payment and a credit score above 740 - it is more than likely that you’ll get a better interest rate through a Government-backed mortgage, like FHA or VA, compared to a Conforming mortgage.

Posted by Gabe Amey. Filed in Closing Costs, Interest Rates, Tips

Condos & Financing: The Devil is in the Details

Let’s start off by clarifying that a condo is not an “apartment” building.  Apartment buildings are multi-unit buildings owned by one entity with units that are rented out.  A condominium or “condo” for short is a way of owning property.  Condos often resemble apartments in the sense that they can be similar in physical appearance.  Especially in cities, they are often multi-story buildings that contain many units.  The difference is that each unit in a condo is individually owned.  Of course, a building is composed of more than just the units.  Sometimes there is a pool, lobby, lawn or some other common area.  Each unit owner has a proportionate interest in the common areas.  For example, if there is a condo with 100 identically sized units, a pool, barbecue area and lobby, each unit owner owns a 1% interest in all of those elements as well as the walls of the building, elevators, etc…

With this ownership interest comes responsibility.  Each unit owner is responsible for helping maintain & insure the common areas, thus each pays a maintenance fee.  Typically, additional insurance is not required, but taxes are the responsibility of each individual homeowner.  So, when buying a condo, the total monthly housing payment is going to include taxes and a maintenance fee, but no insurance, while a single family home purchase results in tax and insurance payments but no monthly maintenance fee.

Condos don’t all have to look like high rises or apartment buildings.  They can take many forms.  A common form is the “townhouse” or “row house” format.  In fact, you may never guess, but your neighbor’s single family house may actually be a condominium.  The popularity of “site condos” has increased in recent years.  Rather than subdividing a property, an owner may create a CPR (Condominium Property Regime) which can allow for multiple single family residences to be built on one lot.

For lending purposes, condominiums have special rules.  Different programs do have different rules.  The FHA (Federal Housing Administration) and VA (Veteran’s Administration) each have their own list of approved condos.  Most site condos are not on that list, but a lot of “typical” multi-unit condos are on it.  The FHA has a requirement that 51% of the units in the condo are occupied by owners or as second homes.  The VA has no occupancy requirement.  Both do have a 2-4 week process for approving condos that are not on the current list (assuming the required documents are available).  Fannie Mae and Freddie Mac also have their own rules, which have changed a lot recently.

So, how can you tell if a property in Hawaii is a condominium?  The only true way is to view the title, or to see the TMK (Tax Map Key) number.  The final four numbers of the TMK will be -0000 if the property is not a condo, but if there is a number there, then it is a condo.  Here is a sample TMK; 3/7-8-009.  If it were a condo, there would be an additional number at the end: 3/7-8-009-0001.

There is also a similar step-brother to condos, the Co-op.  A Co-op is similar to a condo, but rather than owning an interest in the property itself, the property is owned by a company and each unit owner owns shares in the company.  Despite this seemingly minor difference, Co-ops are very difficult to find financing for.  None in Hawaii can be financed via FHA, VA, Fannie Mae or Freddie Mac.

Another variation is the Condo-tel.  This is a condo that allows for short term rentals, usually by having a ‘rental pool’ in which owners can place their units to be rented like a hotel room.  Financing for these can be done by local banks that have their own “portfolios”, but can’t be sold to the FHA, VA, Fannie Mae or Freddie Mac.

Always keep in mind, if you are shopping for a VA loan, use our VA Approved Condominium Check Tool to determine if the condo you are looking at is actually approved for VA financing.

Posted by Jim Owens. Filed in Random, Tips