This Week’s Highlights:
- Rates Forecasted to Increase
- Future Rate Increase: Digging Deeper
- Buying a Duplex: the FHA Financing Option
Rates Forecasted to Increase
The federal reserve met this last week on Wednesday and announced that they would continue to leave ultra-short interest rates alone, directly controlling only the Fed Funds rate (the rate banks lend money to each other overnight). Currently, the Feds Fund rate sits between 0% and .25%.
The only consumer-facing rate this impacts is the prime rate, which moves in relation to the Feds Fund rate and is used for credit cards and most equity lines of credit in America. As of right now, the Federal Reserve isn’t going to touch the Fed Funds rate until the end of 2022.
Since March of 2020, the Fed has shown a huge appetite for low-rate mortgages. They’ve bought $40 billion dollars worth of 2.5% to 3% on a 30-year fixed rate and 2% to 2.5% on a 15 year fixed rate.
During Wednesday’s conference, Fed Chairman Powell announced a plan to buy fewer mortgages and ten-year treasury bonds, and plan to outline that process in the Fall during the next Federal Reserve meeting. Furthermore, St. Louis Federal Reserve president James Bellard spoke with reporters on Friday and suggested that the entire process could be done by early 2022.
All of this suggests that we are a lot closer to seeing rates go up than we’ve ever been. And then the real question is, who’s going to take up that spot to buy mortgages at 2%?
To see how this would affect homeowners down the road, we took a look at the latest forecasts from Freddie Mac, Fannie Mae, and the Mortgage Bankers Association.
- Freddie Mac forecasts that the 30-year fixed rate will increase from 2.8 to 3.3 by the last three months of 2021, and continue to increase to 3.8% by the end of 2022.
- Fannie Mae had a slightly more conservative outlook, suggesting that the 30-year fixed rate will only rise to 3.1% by the end of this year and 3.3% by the end of 2022.
- The Mortgage Bankers Association featured the most pessimistic outlook, calling for the 30-year to rise to 3.4% by the end of the year and 4.3% by the end of 2022.
While it’s impossible to know if any one of these predictions will be completely accurate, they do all point in the same direction — suggesting increased rates in the near future.
Future Rate Increase: Digging Deeper
So how are these rate increases going to affect future payments? Let’s use a $260,000 home in the Five County area as an example. If you had closed in December of 2020 with 20% down your total monthly payment, including taxes, would be $1350. This would have been when the 30-year fixed rate was at 2.625%.
Forecasts say that by the end of 2022 home prices are going to go up 10%. Instead of $260,000, that same home will cost a little over $286,000. The interest rate is expected to increase to 3.4%, increasing that monthly payment by $175 and an additional $5,000 in cash just for the closing.
On top of that, values are expected to increase another 8.4% by December of 2022, bringing rates to 3.875%. In this scenario, payments will be $326 higher than they would be for a homeowner who bought the same home at the end of 2020, with an additional $10,000 needed for closing costs.
With these impending rate increases, many home buyers and owners watching the market will consider two strategies, waiting to buy a new home or renovating their current home. What most people don’t know, however, is that either option should be moved on quickly.
When staying in your current home, refinancing can help gain equity. This leads to a lower monthly rate but can potentially erase your private mortgage insurance (PMI). That equity can then be cashed out and used for remodels to increase the value of your home.
The main takeaway for anybody who wants to take out equity is that acting now is better than waiting, especially with rates as low as they currently are, and the same can be said for those hesitating on finding a new home.
Many potential buyers may not want to pay that additional 10% increase in price that Fannie Mae and Freddie Mac are predicting, but just because you’re not willing to pay for that higher home value doesn’t mean that someone else isn’t.
Homeowners who wait for prices to decrease will be waiting for years to come, which is why it’s so important to act now. If home prices are going to increase 6% or 8% in a year, now is the best time to buy at 5% over the asking price and at least lock in the low rate. The alternative is waiting a year, to pay 8% more and suffer a higher rate.
When it comes to buying a home, nothing is more important than arming yourself with information. Use our online calculator to help you get started with an idea of how much home you can afford, or check current mortgage rates with our up-to-date tables.
Buying A Duplex: The FHA Financing Option
Accunet recently began working with Alex, a first-time homebuyer who started out looking for a duplex. This is a classic first-time home buyer tradition, especially in the Milwaukee area.
Many duplex owners will live in the home for a year or two, then move out and keep it as a rental. And while this has been common practice in the past, it’s not the same in 2021.
Up until 2020, you could still put 5% down on a regular 30-year fixed rate duplex if it was owner-occupied. Fannie Mae and Freddie Mac recently changed this and now require a minimum of 15% down to buy a duplex. Fannie Mae makes it even harder by requiring additional money leftover after closing that is equal to six months of payments.
In other words, if your payment is $1,500 per month, you’ve got to come up with another $9,000 for closing alone, in addition to the big 15% down payment.
There is another option though, albeit a less popular route. FHA allows 3.5% down but will scrutinize any potential hazards on the property. Some of these hazards may include:
- Lead hazards due to chipping or peeling paint
- Tripping hazards due to a lack of hand railings or uneven pavement
- Potential mold issues
When borrowing through FHA, they will investigate the property with more scrutiny to ensure everything meets their safety standards. When you look at duplexes you can sometimes see properties with hand railings, which suggests that the home has an FHA loan on it, as they would require it.
While FHA is an option for duplex financing, it’s not as popular due to the stricter regulations. As of last Sunday, 615 duplexes have been sold in the city of Milwaukee, and only a quarter of them had FHA financing.
Navigating the evolving world of home buying can be daunting. After reviewing your credit score, income, and down payment, the experts at Accunet Mortgage and Realty can offer you a Rock-Solid Pre-Approval that will ensure you can rest easy in a home that you love.
Contact us today to get started!
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