As of October 1, 2016, the USDA lowered the upfront and ongoing mortgage insurance fees for the USDA Guaranteed Home Loan Program.  The USDA Home Loan Program enables eligible borrowers to buy homes located in federally-designated rural areas with no down payment.  The program is designed to help individuals with low-to-moderate incomes afford to buy homes in rural communities.  USDA guaranteed home loans are available through approved lenders such as banks, mortgage  brokers, mortgage banks and credit unions but the loans are backed, or insured, by the USDA.

 

The USDA charges borrowers upfront and ongoing monthly fees to provide insurance that protects lenders in the event that borrowers default on their mortgage and cannot repay their loan.  These fees are similar to upfront and ongoing FHA mortgage insurance premium (MIP) for an FHA home loan or the monthly private mortgage insurance (PMI) fee for a conventional loan.  The upfront USDA mortgage insurance fee is also called a guarantee fee and the ongoing mortgage insurance fee is known as an annual fee (even though borrowers pay the fee monthly along with their mortgage payment).

 

On October 1st, the USDA reduced the upfront mortgage insurance fee from 2.0% of the loan amount to 1.0% of the loan amount and reduced the ongoing annual insurance fee from 0.5% of the loan amount to 0.35% of the loan amount.  The reduction in the upfront and ongoing USDA mortgage insurance fees reduces closing costs and total monthly housing expense for borrowers.

 

For example, based on the lower fees, for a $200,000 loan the upfront guarantee fee is reduced from approximately $4,080 to $2,020 and the ongoing monthly fee is reduced from $85.00 to $59.00. The example below demonstrates how the fees are calculated.

 

Up-front USDA mortgage insurance or guarantee fee

• First, we calculate the total mortgage amount including the the upfront USDA mortgage insurance fee:
• $200,000 (mortgage amount before USDA mortgage insurance) + $2,000 (upfront USDA mortgage insurance) = $202,000 total mortgage amount
• $202,000 (total mortgage amount) * 1.0% (upfront USDA mortgage insurance fee) = $2,020 (up-front USDA mortgage insurance fee)

 

Ongoing monthly USDA mortgage insurance fee

• $202,000 (total mortgage amount) * .35% (ongoing annual USDA mortgage insurance fee) = $707 (ongoing annual USDA mortgage insurance fee) / 12 months = $59.00 monthly USDA mortgage insurance fee

 

Reducing mortgage insurance fees for the USDA home loan program should make home ownership more attainable for more borrowers, especially for people who can afford to make a monthly mortgage payment but who may struggle to save money for closing costs.
FREandCLEAR provides a comprehensive overview of the USDA Home Loan Program including borrower qualification requirements and property eligibility guidelines.  We also encourage you to use our USDA Home Loan Calculator to determine what size USDA loan you can afford as well as the upfront and monthly USDA mortgage insurance costs based on the new, lower guarantee and annual fee rates.

We want to highlight a new Freddie Mac mortgage program designed to extend home ownership to more borrowers. Freddie Mac, in collaboration with Alterra Home Loans and New American Funding, launched the Your Path Mortgage Program to address the growth in multi-generational households and increase in borrowers with non-traditional income sources.

 

Similar to other low down payment programs, Your Path only requires a 3.0% down payment but offers more flexible mortgage qualification requirements that should expand the pool of potential home owners. Innovative features of the program include:

 

• Include income from non-borrower household members
• Include income from a second job with only a year of work history
• More options for self-employed borrowers to demonstrate income
• Flexibility to include income from seasonal employment
• Reduced documentation required to show source of down payment

 

We provide a comprehensive overview of the Your Path Mortgage Program on FREEandCLEAR including key program information and borrower eligibility requirements.

 

We also added the program to our informative comparison of low and no down payment mortgage programs. Our comparison chart continues to be a highly valuable tool for borrowers and housing advocates to compare, contrast and select a low or no down payment mortgage program.

 

 

Although the Your Path Program was announced as a twelve month pilot program, it represents another potentially attractive mortgage option for low-to-moderate income home buyers along with competing programs such as the HomeReady and FHA Mortgage programs.

 

Please review our resources and share your feedback as we are always seeking input on how to improve FREEandCLEAR.

We have all seen ads floating around the Internet that promise to let you in on a special secret that magically cuts your mortgage in half.  The ads scream “Use this Trick to Cut Your Mortgage in Half” or “This Mortgage Secret has Banks on Edge — Will Save You Thousands” or how about “This Obama Program Takes 15 Years Off Your Mortgage.”  The exact verbiage of the ads may be a bit different but you get the idea.  The ads are ubiquitous and enticing — who wouldn’t want to cut their mortgage in half?  

 

At FREEandCLEAR, we are passionate borrower advocates and always seeking new ideas to help people save money on their mortgage so we decided to dig a little deeper.  Could there really be a government program, secret, trick or perhaps a magic wand that cuts your mortgage in half?  Much to our dismay, these claims fall under the category of too good to be true.  Most of the ads direct people to online forms where you are requested to submit your personal information and in return for providing your information you are contacted by multiple mortgage lenders.  There is nothing wrong with requesting someone’s contact information and we are certainly proponents of comparing lenders when you shop for a mortgage.  Not surprisingly, however, these websites do not offer borrowers miraculous tricks or magical spells to slice their mortgage in half, so the ads are misleading at best.

 

But what if we wanted to actually cut our mortgage in half? Is that even possible or simply a false myth promulgated by deceptive Internet ads?  It turns out that there are legitimate ways to cut your mortgage in half (or nearly half) and none of them involve tricks.

 

Select a 15 Year Mortgage Term

The easiest way to cut your mortgage in half is to literally do just that.  Most borrowers select a 30 year mortgage because it offers them the lowest mortgage payment which allows them to qualify for a larger mortgage amount and buy a nicer home.  Selecting a 15 year mortgage, so literally cutting the length of your mortgage in half, can save you tens of thousands or even hundreds of thousands of dollars in interest expense over the life of your mortgage.  A 15 year mortgage enables borrowers to save money two ways.  First, by cutting the term in half, you pay off your mortgage in half the time which means you pay a lot less interest.  Second, the interest rate for a 15 year mortgage is lower than the interest rate for a 30 year mortgage.  So not only do you pay interest for a shorter period of time but you pay a lower interest rate.  The downside of a 15 year mortgage is that the monthly payment is higher.  The example below illustrates the difference in interest rate, monthly mortgage payment and total interest expense over the life of the loan for a $300,000 30 year mortgage as compared to a 15 year mortgage. 

 

Example: Comparing a 30 Year Mortgage to a 15 Year Mortgage

30 Year Mortgage

Interest Rate: 3.625%

Monthly Payment: $1,368

Total Interest Expense Over Mortgage: $192,534

 

15 Year Mortgage

Interest Rate: 2.750%

Monthly Payment: $2,036

Total Interest Expense Over Mortgage: $66,455

 

Based on today’s interest rates, a borrower would saves $126,080 in total interest expense over the term of the mortgage with a 15 year mortgage as compared to a 30 year mortgage but the monthly mortgage payment for the 15 year mortgage is $670 higher.  It is important to highlight that the higher the interest rate and greater the mortgage amount, the more money you save with a shorter mortgage.  As the example demonstrates, if you can afford making a higher monthly payment, selecting a 15 year mortgage enables you to cut your mortgage in half and save thousands of dollars in interest expense over the life of your mortgage.

 

Mortgage Acceleration

Another way to shave years off your mortgage is by using mortgage acceleration, or paying more than your required monthly mortgage payment.  In essence, by overpaying your mortgage, acceleration enables you to pay down your principal balance faster which reduces the length of your mortgage.  By reducing the length of your mortgage you reduce your total interest expense over the life of your mortgage (as exhibited above when we compared a 15 year mortgage to a 30 year mortgage).  The length of time you reduce your mortgage by and amount of interest expense you save depends on how much you accelerate your mortgage.  The more you overpay, the quicker you pay off your mortgage and the more money you save.  The example below demonstrates how mortgage acceleration works by comparing a $300,000 30 year fixed rate mortgage where the borrower makes the required monthly payments to an accelerated mortgage where the borrower overpays by $500 every month over the life of the loan.  By accelerating the mortgage the borrower reduces the mortgage term by 11 years and 8 months saves $82,074 in interest expense over the life of the mortgage.  You can use the Mortgage Acceleration Calculator on FREEandCLEAR to evaluate different overpayment amounts for your mortgage.      

 

Example: Mortgage Acceleration

30 Year Mortgage

Monthly Payment: $1,368

Mortgage Length: 30 years

Total Interest Expense Over Mortgage: $192,534

 

30 Year Mortgage with Mortgage Acceleration

Monthly Payment: $1,368

Monthly Overpayment: $500

Mortgage Length: 18 years and four months

Total Interest Expense Over Mortgage: $110,460

Total Interest Expense Savings: $82,074

 

Mortgage acceleration is ideal for borrowers who are looking to reduce their mortgage term but want to preserve the option of making the lower 30 year mortgage payment.  One creative way to think about mortgage acceleration is to get a mortgage with a 30 year term but make the same payment that you would with a 15 year mortgage.  That way you maintain the flexibility of having a lower required monthly mortgage payment that goes along with a longer mortgage term (in case you cannot afford to make the higher payment), but you pay off your mortgage in 15 years and save hundreds of thousands of dollars in interest expense.

 

The good news about mortgage acceleration is that it is the borrower’s choice completely.  You could decide to accelerate your mortgage by $500 one month, $1,000 the next month and then make your required payment the following month.  You can apply mortgage acceleration at any time — for the entire term of your loan or you can start and stop years into your mortgage.  Additionally, you do not incur any additional cost by accelerating your mortgage.  Simply add the overpayment amount to your monthly or bi-weekly mortgage payment and indicate to your lender that the extra amount goes to pay down your principal balance (either in the comments section of your check or by contacting your lender if you use auto pay).  Although you would have to pay significantly more than your scheduled payment to literally cut your mortgage in half, mortgage acceleration can be a powerful tool for borrowers to eliminate years and thousands of dollars from your mortgage.

 

So do not let the ads fool you — there is no shortcut to cutting your mortgage in half.  And selecting a shorter mortgage or applying mortgage acceleration are certainly not mortgage industry secrets.  All borrowers need is the right information, sound financial planning and a little discipline to trim years from their mortgage and save thousands of dollars.

The movie The Big Short has thrust the mortgage and real estate markets into the spotlight again.  The movie does an excellent job of explaining very complicated financial issues while also powerfully conveying the emotionally devastating effects of the collapse of the real estate market and economy in 2008.  Some of the most poignant scenes in the film show how people lost their homes, jobs and even their lives as the mortgage and real estate bubbles imploded.

 

Almost eight long years have passed since The Big Short era and both the real estate market and economy have rebounded.  Nothing will erase the pain and anguish experienced by millions of borrowers who lost their homes but a stabilized mortgage market, improving property values and surging home sales show how far we have progressed since the market collapsed.  Whereas eight years ago the mortgage market was dominated by plummeting property values, skyrocketing foreclosures and lender failures, today, industry experts credibly debate if bubbles are forming in certain housing markets.

 

Recently, we have seen multiple examples of relaxed lender requirements and more aggressive mortgage programs.  Lenders have introduced mortgage programs that require no down payment or credit scores for selected borrowers. Quicken Loans is aggressively promoting its Rocket Mortgage program that promises a home loan with the click of a button.  Interest only mortgages rebounded in 2015 after being left for dead several years ago.  Adjustable Rate Mortgages (ARMs) are eligible under Fannie Mae’s recently launched HomeReady Mortgage Program for low-to-moderate income or credit-challenged borrowers (although most HomeReady participants will likely select fixed rate mortgages).  Regulators also reduced mortgage waiting periods following adverse credit events such as a short sale or foreclosure.

 

Booming home prices in many cities and loosening borrowing standards make us wonder if we have already forgotten the painful lessons of 2008 and lead us to ask the question: could The Big Short happen again?  Examining how the four primary constituents that comprise the mortgage market: (1) the government, (2) lenders, (3) Wall Street and (4) borrowers responded to the meltdown enables us to evaluate what has changed between 2008 and today and answer that question.

 

It is fair to say that the federal government responded to the mortgage market crash with a vengeance.  New government regulations are designed to protect borrowers and make lenders more accountable.  Regulations require lenders to demonstrate that borrowers can pay back their loans and riskier mortgage programs such as option ARMs that enticed uninformed or aggressive borrowers with low teaser payments are prohibited.  These regulations have also severely restricted the mortgage broker and limited borrower lender options but that is a topic for a different article.  We can argue the effectiveness of the government’s response to the mortgage disaster but the new rules have ended the days of strippers using no income, no assets option ARMs to grow their real estate portfolios.

 

The fortunate mortgage lenders that survived the market crisis also reacted strongly. Either in response to government regulations or on their own volition, lenders significantly tightened lending standards.  Lenders actually required 20% down payments and focused on borrowers with superior credit profiles.  For several years it became incredibly challenging if not downright painful to get a mortgage.  Dealing with lenders felt like hand-to-hand combat and if you were self-employed or an independent contractor like the stripper in The Big Short, forget about it.  Despite several recent cases of relaxed lending standards, getting a mortgage remains challenging for many borrowers.  Saving for the down payment required by lenders for conventional mortgages represents a significant obstacle for borrowers, especially first-time home buyers. So perhaps dealing with lenders today feels more like a proctology exam (a necessary but unpleasant experience) than hand-to-hand warfare but the easy lender money has certainly dried up.

 

Which brings us to Wall Street — the source of the financial fuel that powered the market bubble and the lightning rod for the financial meltdown according to many industry experts, politicians and certainly the producers of The Big Short.  An easy and popular target, the money men depicted in the film were at best unethical, avaricious enablers and at worst dirty, rotten criminals. (Although The Big Short acutely highlights that only one financier has been convicted of criminal activity stemming from the crisis).  The collapse of AIG, Bear Stearns, Lehman Brothers and Merrill Lynch caused hardship for thousands but many argue that no pain or punishment is too severe for unscrupulous bankers.  I tend to believe that leopards never truly change their spots; however, in response to intense regulatory pressure Wall Street has adopted reforms designed to prevent another market collapse.  Industry consolidation, increased capital requirements, retrenched trading operations and greater oversight should enable Wall Street to weather another financial storm although I doubt anyone wants to test Too Big to Fail.

 

While the government’s, lenders’ and Wall Street’s roles in, and reaction to, the market collapse are identifiable and open to harsh criticism, the role the borrower played is more ambiguous.  Were borrowers greedy or ignorant? Were they exploiting a bubble-driven market opportunity or being exploited by predatory lenders and other industry charlatans?  Wherever you fall in that argument, there is little debate that millions of uninformed borrowers got mortgages they did not understand and could not afford.  The resulting pain from countless foreclosures tarnished the American dream of owning a home and provoked borrowers to pull back.  The psychological hangover from the bubble bursting, combined with many factors including stricter lending standards, caused home ownership to sink to an all-time low in 2015.

 

So borrowers have become more gun-shy but have they become more informed?  A recent survey of mortgage borrowers by FREEandCLEAR suggests no.  When asked what percentage of their gross income borrowers should spend on monthly housing expense and debt, only 13% selected the correct answer (43% is the debt-to-income ratio most lenders use) and 30% indicated they did not know.  Understanding what size mortgage you can afford is the first step in the mortgage process so the lack of awareness on this topic demonstrates how uninformed borrowers remain.  The government can impose regulations and banks can enforce lending standards but ultimately it is the borrower’s responsibility to get a mortgage they understand and can afford.  And as The Big Short so accurately and agonizingly depicted, borrowers, not the government, lenders or bankers, pay the most severe penalty for being uninformed.            

 

A better understanding of the responses by industry stakeholders to the mortgage crisis allows us to return to the question at hand: could The Big Short happen again? Based on the measures taken by the primary industry participants the answer is probably not.  But are mortgage borrowers any more informed than they were eight years ago? Probably not.

 

Michael H. Jensen is the co-founder of FREEandCLEAR, a leading mortgage website that enables borrowers to find the mortgage that is right for them.  FREEandCLEAR’s mission is to empower borrowers to make better mortgage decisions, save money and avoid getting ripped off.  To become an informed mortgage borrower visit www.freeandclear.com.

The National Association of Realtors pending home sales index tracks the number of existing homes that went into contract to be sold.  When a home seller and buyer agree to the price and terms of a home sale, they sign a contract that outlines the transaction details and the property is said to be “under contract.”  The home sale process is typically completed four-to-six weeks after the property goes under contract so the pending homes sales index is a leading indicator, or predictor, for the real estate market.  An increase in the index reflects an increase in existing home sales while a decrease in the index reflects a decrease in existing home sales.  It is important to point out that the index tracks existing home sales as opposed to new home sales, or homes that are recently constructed that have not been lived in previously.  When people purchase a home they typically get a mortgage so the index also forecasts future activity in the mortgage market. The pending home sales index is released on a monthly basis and provides figures for the prior month.

 

After reaching a nine-year high in May, the pending homes sales index reversed course in June.  Pending home sales fell short of analyst expectations with the June pending home sales index dropping 1.8% on a month-over-month basis (as compared to May 2015). Analysts were expecting an increase of approximately 1.5%.  The decline in the index was surprising given the recent string of positive housing market reports including a very strong existing home sales report for June.  The pending home sales index was dragged down by lackluster results in the South and Midwest while the West and Northeast regions edged higher.  Although the June figure disappointed, year-to-date the pending home sales index is up 8.2% showing the overall strength of the existing home sales market.  (Source: Bloomberg)

 

What it Means for Mortgage Borrowers

The pending homes sales index had reached a post housing market recovery high in May so it is not a total surprise to see the index pull back in June, especially in light of the modest increase in interest rates over the past several months.  If will be interesting to see if the soft June pending sales figure results in a dip in final existing home sales later this Summer.  Although the broader housing and mortgage markets appear to be gaining sustained momentum prospective home buyers can potentially take advantage of the dip in pending home sales to make their move.  As you navigate the home buying process use our Mortgage Qualification Calculator to determine what size mortgage you can afford and keep track of mortgage rates and fees for lenders in your area with our INTEREST RATES feature.

 

The FREEandCLEAR Mortgage Expert

www.freeandclear.com

At FREEandCLEAR, we follow the Mortgage Bankers’ Association (MBA) mortgage applications index which measures both purchase and refinance applications for mortgage lenders across the country.  An increase in the MBA applications index reflects an increase in mortgage applications while a decrease in the index reflects a decline in mortgage applications.

 

The mortgage applications index remained relatively flat for the second week in a row.  For the week ended July 24th purchase applications held steady, dropping 0.1% after increasing 1.0% the prior week.  Refinance applications increased a modest 2.0% after decreasing a modest 1.0% the prior week.  The composite applications index, which includes both purchase mortgages and refinancings, increased 0.8% on the week after inching up 0.1% the prior week.  In positive news for borrowers, mortgage rates dipped with the average interest rate for conforming loans (mortgage amount less than $417,000) sliding to 4.17% as compared to 4.23% for the prior week.  (Source: Bloomberg)

 

What it Means for Mortgage Borrowers

After some pretty wild gyrations over the course of the first half of the year, mortgage application activity was relatively calm to close out July.  Steady application activity and a drop in interest rates are both positive developments for borrowers.  If you have been thinking about refinancing now may be a good time to start the process.  Use our Refinance Calculator to determine how much money you can save by refinancing your mortgage.  If you are a prospective home buyer you should consider taking advantage of lower interest rates to make your move.  Use our Mortgage Qualification Calculator to determine what size mortgage and home you can afford based on today’s mortgage rates.

 

The FREEandCLEAR Mortgage Expert

www.freeandclear.com

The Federal Reserve determines monetary policy in the United States, and monetary policy, in turn, is one of the most important factors in determining mortgage interest rates.  So when the Federal Reserve speaks, FREEandCLEAR listens closely and passes along our insights to the the FREEandCLEAR community.  The Federal Reserve sets a target for the Federal Funds Rate which influences other interest rates, including mortgage interest rates.  Although there are other factors involved, the lower the Federal Funds Rate, the lower mortgage rates and the higher the Federal Funds Rate, the higher mortgage rates.  The Federal Open Market Committee (FOMC) is responsible for determining the Federal Funds Rate and meets eight times a year to discuss what the target rate should be.  After every meeting, the FOMC releases a policy statement that discusses the target Federal Funds Rate as well as other monetary policy and economic issues.  The FOMC announcement can have a significant impact on mortgage rates depending on if the FOMC changes the target Federal Funds Rate and the language the statement uses to discuss monetary policy and the economy.

 

In its most recent FOMC announcement released on July 29th, the Federal Reserve left the target Federal Funds Rate unchanged at 0% to .25%.  The FOMC highlighted improvements in employment but also pointed out continued challenges in household spending and business investment. FOMC members review a wide range of economic statistics and indicators but is broadly focused on promoting low unemployment and maintaining reasonable inflation.  There were no significant changes or surprises included in the FOMC announcement and mortgage rates dipped slightly following its release.  Following the announcement most industry analysts affirmed their expectations that the FOMC will raise interest rates in either September or December of 2015.  No members of the FOMC offered their dissent in the statement which indicates that the committee is generally unanimous on its interest rate policy.

 

What it Means for Borrowers

In short, the July FOMC announcement proved to be a non-event.  With no changes to the target Federal Funds Rate and very few changes to the language used by the FOMC to communicate interest rate policy, mortgage rates remained relatively unchanged following the announcement and have actually declined moderately over the past month.  Despite the lack of market reaction the FOMC appears on track to raise the target Funds Rate by the end of 2015.  FREEandCLEAR will be watching the September FOMC meeting closely as most analysts predict that this is the soonest the Federal Reserve would consider raising interest rates.  You can keep a close eye on mortgage rates for lenders in your area using the INTEREST RATES feature on FREEandCLEAR.

 

The FREEandCLEAR Mortgage Expert

www.freeandclear.com

There are two primary measures of housing prices that we track at FREEandCLEAR: the Federal Housing Finance Agency (FHFA) House Price Index, which uses certain nationwide mortgage activity to track home prices and the S&P / Case-Shiller Home Price Index, which tracks home prices in 20 U.S. metropolitan markets.  Both indices are reported on a monthly basis and include information for the month that is two months prior to the reporting date.

 

The July reports for the FHFA House Price Index and S&P / Case-Shiller Home Price Index showed mixed results for May.  While the FHFA House Price index moved up, the S&P / Case-Shiller Home Price Index surprising moved in the opposite direction.  The FHFA House Price Index for July 2015 showed that May housing prices increased 0.4% as compared to April and increased 5.7% on a year-over-year basis (so as compared to May 2014).  The FHFA House Price Index figures came in at the the midpoint of analyst estimates and were flat compared to April 2015, which also showed a 0.4% monthly increase and a 5.3% year-over-year increase.  The housing price appreciation reflected in the FHFA House Price Index does not come as a surprise given the favorable trends in the recent new and existing home sales reports.  What does come as a surprise is that the S&P / Case-Shiller Home Price Index showed that May housing prices decreased 0.2% as compared to April while increasing 4.9% on a year-over-year basis.  Both figures came in below analyst expectations.  Of note in the S&P / Case-Shiller Home Price Index report is that twelve of 20 cities included in the index showed price declines, up from eight cities in April.  (Source: Bloomberg)

 

What it Means for Mortgage Borrowers

We always like to point out that there is a two month lag in the data reported by the FHFA House Price and S&P / Case-Shiller Home Price indices but both reports showed that home price appreciation moderated in May.  Cooling housing prices are a positive for borrowers as they makes housing more affordable.  For example, softening May housing prices are likely one of the factors that contributed to strong housing sales in June.  It is important to highlight that housing price trends vary significantly by market but the overall trend in May benefited borrowers.  It is uncertain what direction housing prices will take in the future but prospective home buyers can use our Mortgage Qualification Calculator to determine what size mortgage you can afford today.  Additionally, you should use the INTEREST RATES feature on FREEandCLEAR to compare mortgage rates and fees for lenders in your area and find the mortgage that is right for you.

 

The FREEandCLEAR Mortgage Expert

www.freeandclear.com