The Housing Affordability Index was developed over thirty years ago to help consumers determine when it is a good time to buy a home. It’s considered advantageous to the buyer when the index is over 100 because a median income family can qualify for a median price home.

Recent figures released by the National Association of REALTORS‘ economic department show that the 2011 index of 184.5 is the highest annual average since it has been calculated. The most recent month released, December 2011, was 194.9. The index is also broken down into four regions of the country.

The two major components that contribute to the index are home prices and mortgage interest rates which are lower than they’ve been in the last five years which account for the dramatic rise in the index since 2006.

The Housing Affordability Index is just another indication that this is a good time to buy a home for people who have good credit, a down payment and want a home. It could be the “perfect storm” with diminished pricing + the lowest interest rates in 50 years!! It just could be the best time we’ll see in our lifetimes. Mortgage lending for primary residences and 2nd homes has become more accessible.  Now if they would only loosen up the reigns on investor financing!!! If you are thinking about purchasing a new investment property, you might be interested in how lenders calculate rental income!

Risk Determines Rate

Regardless of what a lender quotes on mortgage rates, the actual rate paid by a borrower is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.

Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.

• Loan amounts – conventional loans for more than the conforming limits set by Fannie Mae are considered jumbo loans and generally have a higher interest rate.
• FICO score – the lowest interest rate is reserved for the highest credit scores; the lower the score, the higher the rate borrower will pay.
• Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
• Loan purpose – purchase transactions generally have the lowest interest rate while refinancing a home is generally higher.
• Debt-to-Income ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
• Loan-to-Value ratio – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.

Any combination of these factors could limit your ability to secure a mortgage at the rate initially quoted. Being pre-approved by a trusted mortgage professional is the best way to know what rate you can expect to pay. Please call for a recommendation.

How interest rates affect a monthly mortgage payment

A simple one-percent increase in interest rates can have a dramatic effect on the payment. Making a loan application and locking in the rate are key strategies to keeping your payments as low as possible.

If you think you might be ready to make a new home or investment property purchase, call me (503-709-0802) or write (jj@janeesejackson.com ) and I’ll help you make an appointment with a mortgage professional. We will form a team to find that new residence or investment!!

Diversify, diversify, diversify!!  It’s always been the “battle cry” of financial planners.  “Don’t put all your eggs in one basket”, my mother used to say.  I was always a little confused as we didn’t have any chickens nor did we grocery shop with baskets?  Nonetheless, with the wild ride the stock market is taking I’m very happy that not all my “eggs” are in my mutual funds and stock portfolio!  My investment real estate feels very good to me.  I can drive by, touch it, weed the flower beds.  And while someone else pays off my mortgage, I can reap the benefits of an immediate cash flow and tax write-offs!  Those are all good reasons to purchase an investment.  But, okay, so being a landlord is not your thing!??  Have you considered a vacation or 2nd home?  If you can afford the two payments, you might at least get some enjoyment out of your money.  Interest rates continue to hover at all-time lows (I just got a 30-yr fixed rate on my investment duplex mortgage at 5.125%.  Rates are even lower for owner-occupied).  Simply amazing!  Market conditions make it particularly attractive to be a buyer (as long as you do your homework).  Now the mortgage process may make you temporarily crazy, but if you have a good down-payment and good credit you can reap the benefits of  the declined property prices and low interest rates!

The “Oregon Legal Journal” just recently published two articles (July 29, 2010) regarding “Home Buying Applications Sink to 13-Year Low” and “Portland Rental Market Thriving as Home Prices Continue to Decline”.  This points to an obvious need for available properties to rent.  Just sayin….that I believe in diversity!

Initial Jobless Claims Down:
Initial Jobless Claims were down by 20,000 last week.  While the overall numbers were still bad, this is the first time in quite a while that we have had any sliver of positive news in the employment numbers.

This is important because our housing markets have always been tied directly to employment levels.  As the employment picture starts to level out, consumer confidence will rise and will lead to increased interest in housing.  We could consider taking advantage of these great rates and large selection of homes on the market while home prices are still at bargain levels.

What happened to rates last week?
The Mortgage Backed Securities (MBS) market closed early on Thursday.  We ended up slightly for the week but we had a roller-coaster ride.

We saw a huge rally in Fannie Mae mortgage backed securities on Tuesday and Wednesday that caused 30 year fixed mortgage rates to fall.

But we gave it all back by Thursday’s market close which caused 30 year fixed rates to move back to their levels on Monday.

CHANGES IN THE MORTGAGE INDUSTRY:

The mortgage industry is changing and the requirements to garner financing are being refined.  MORTGAGE LOANS ARE AVAILABLE, only the rules have changed.  Interest rates are VERY LOW but volatile throughout the day.  It is not uncommon to start the day with 4.875% rates and be at 5.25% by noon.  Or the opposite, drop from 5.25% in the am and end the day at lower rates.  This has been going on now for about 9 weeks.  So, locking loans is a conundrum.  I have a personal theory that you need to get comfortable with a low rate and the payments involved and, then, quit watching, as it will make you a crazy person!

LOCKING MORTGAGE LOAN RATES: 

The difference between a 10 day vs. 30 day lock is that the rate spread is HUGE!  The industry is seeing as much as a .375% rate difference and .24% is common.  As a comparison, for 10+ years the usual spread was the same interest rate on a 10 day or a 45 day lock.  Many lenders are heavily suggesting to buyers to “float to close” to get the better deals as you can’t close a mortgage today in much less that 30 days (although, there are definitely exceptions). 

RISK BASED PRICING ON MORTGAGES:

While not new, risk based pricing just got amended again.  You now get the best “deal” with a 740+ credit score.  Any lower credit scores pay more in fees or points.  The fees are cumulative (the lower the credit score, the higher the fees).  On investment properties, you get the best mortgage rate with at 75% loan-to-value (LTV) or 25% down.  Otherwise, you get dinged with extra fees.  Single family investment properties have the lowest fees and duplexes and 3-4 units add on other fees.  Manufactured homes can be hardest hit (if you can even find someone to do them).  In other words, lenders are now “passing on the risk” to borrowers on mortgage loans with extra fees.  This is just one more reason to manage your credit score, either maintain your good credit or start working with a lender to repair your damaged credit.  All of these changes are the mortgage industry’s response to the last two years of losses and the new regulations passed.  They are market responses to avoid losses and make up past mistakes.  The days of exceptions, loose underwriting and cheap loans for higher risk borrowers are gone.  The mortgage industry, HOWEVER, is still doing loans at higher debt ratios that the early ‘90s.  There is still 100% financing on USDA & VA at low debt ratios.  There is still FHA at 3.5% down (and it can ALL be a gift).  There are great loans and lending out there, you may just need a good navigator!!!