Are you ready to buy a home? You’re not alone! Six million people buy properties each year, and 87 percent of them use a mortgage, or a loan to finance a home. With that thought in mind, in today’s blog post, we want to cover mortgage basics that home buyers need to know as well as what’s next for the housing market.
To start, let’s look at some key mortgage terms. As a home buyer, you are the borrower. The lender is the company that funds your loan. The down payment is the amount of cash given at the start of the transaction, and the loan amount is called the principal. The interest rate is the borrowing rate on your mortgage, which you’ll pay on top of the principal. Most mortgages are paid off over 30 years, which is called the loan term.
Now that you’ve got the mortgage basics down, it’s time to expand your education!
To provide you with the best information possible, we looped in Michael Dean, a branch manager for CrossCountry Mortgage in downtown Orlando. Below, he shares five questions that borrowers often ask along with his expert answers.
Does it cost me anything for a pre-approval?
No, you should never need to pay out of pocket for pre-approval. If a loan officer ever asks you to do so, you should explore other options.
Am I obligated to use the mortgage company who pre-approves me?
No. You are not bound to a lender until you close on your loan.
Should I pay off debts prior to having my credit pulled?
You certainly can, but many customers are surprised to hear that we prefer you don’t. When we pull your credit report, we have analyzers that can fine tune your debt payoffs for the highest desired credit score with the amount of cash you have available. In other words, we can likely give you a much lower cost option to achieve your desired credit score than if you were to pay off your debts at random.
If I am self-employed, how do you determine my income?
When reviewing a self-employed applicant, we typically review two years of federal tax returns in order to calculate your effective monthly income. Simply put, we start with your revenue and then subtract your expenses to arrive at your net profit. Understanding how to truly calculate your income from tax returns is a challenge, and that’s why it’s important to work with a loan officer who knows how to calculate your effective income and also understands your income and the nature of your business. If you think tax returns aren’t the best way to analyze your profitability, there are alternate programs for self-employed applicants if needed.
Why do rates change?
Treasury bonds, which are backed by the federal government and considered safe to investors, drive mortgage rates. With mortgage bonds, if the underlying mortgages default, the bond holder does not get paid. Therefore, investors looking to purchase mortgage bonds are going to expect a higher yield than they’d receive from the much safer treasury bond.
Fixed-mortgage rates and treasury yields tend to move together because fixed-income investors compare the returns they can receive on government bonds with mortgage-backed securities. Thus, when treasury bond yields go up, investors require a higher yield for mortgage rates because they are a higher risk. When treasury yields go down, the yield that investors require on mortgages also goes down, which drives mortgage rates down. This constant readjustment of bond prices and yields (both of which trade in the open market) are what ultimately cause interest rates to change.
Speaking of changing rates, it’s no secret that mortgage rates have changed drastically since the start of 2022.
As Michael explains, economic relief measures taken at the beginning of the pandemic have led to inflation concerns. Now, mortgage rates have increased, which many economists believe will reduce demand and ultimately help to lower inflation. “These market changes occurred very rapidly in Q1 and continued in Q2 but have begun to level out as we enter Q3,” he adds.
So what can home buyers expect next? Inflation is nearing a 40-year high, and the market is facing a lot of volatility. Interest rates will continue to rise through the end of 2022, just less dramatically. Once inflation calms down, mortgage rates will begin to fully stabilize.
Just as mortgage rates are impacted by treasury bonds, the housing demand is impacted by mortgage rates. We’ve all seen what lower interest rates did to increase the housing demand over the last two years. Conversely, a rise in rates decreases the demand. “Understanding this dynamic is crucial. Rate changes do not exist in a vacuum,” Michael explains. “Remember: You can always refinance your rate but not the price you paid. So purchasing a home today actually acts as a hedge against inflation in the future.”
Let The Urban Dog Group help you with your real estate needs. Contact Christine Elias at firstname.lastname@example.org.