Interest Rates Have Risen

That’s right even with the Fed’s buying of Treasuries.  There are so many people out there that leading up to QE2 (Quantative Easing 2, the Fed’s announcement of their bond purchases) thought rates would drop and took a gamble.  Interest rates before their announcement at the beginning of November were around 4% paying no points on a 30 year fixed.  Now they are at about 4.875% paying no points, WOW!

“If you don’t read the newspaper you are uninformed and if you do read the newspaper you are misinformed” – Mark Twain.  Don’t believe everything you read and you need to talk to an expert on mortgage-backed securities.  An expert is someone who follows mortgage bonds real time everyday and knows what makes them move.  Most who have commented on the work QE2 have no idea what it means. 

To start off, the Fed is buying Treasuries which are not what interest rates are tied to.  Treasury bonds can have an indirect affect on interest rates but mortgage-backed securities are what interest rates are tied to.  I would be lying to you if I didn’t think that the Fed’s announcement would have an impact on interest rates but I wasn’t about to gamble.  I locked all of my loans in prior to the announcement and prepared those who may be able to lock in an interest rate on a refinance if rates were to fall. 

The bottom line is that no one can be certain what interest rates will do but you can remove the risk by locking in an interest rate and if interest rates improve you can renegotiate your rate lower.  Make sure to talk to your mortgage professional about renegotiations because each lender has a different policy.  At the end of the day it’s better to be locked wishing you were floating then to be floating wishing you were locked.

FHA versus Conventional Loans

Now more than ever it is better to go with a Conventional loan than an FHA loan.  In the State of Florida, and FHA loan requires 3.5% down and a Conventional loan requires a minimum of 5% down.  The only problem some may run into with getting a Conventional loan is that you need a minimum of a 720 credit score and it cannot be a condo.

The debt to income ratio requirements on a Conventional loan are more strict limiting it to a maximum of 41% and sometimes as high as 45% but really you shouldn’t be any higher than that anyway.  Just based upon what the mortgage insurance companies are doing you can see more liquidity is coming back to the market.  You can now get financing on attached housing in Florida and go up to 45% debt to income ratios where before no one was going over 41%. 

With a Conventional loan the monthly mortgage insurance is less than that of an FHA loan.  Typcially a Conventional loan only requires you to keep the mortgage insurance on for a minimum of 2 years AND until you have 20% equity in the property where FHA is 5 years AND 22% equity.  It is your responsibility as the borrower to contact your mortgage servicer to get it removed.

In addition to an FHA loan having a higher monthly mortgage insurance premium there is also a one time Upfront Mortgage Insurance Premium (UFMIP) of 1% of your loan amount.  This does get wrapped into your loan amount but is a charge nonetheless. 

MGIC, one of the mortgage insurance companies, has a great illustration comparing a Conventional loan to an FHA loan http://mgic.com/education/mi_better_option.html. 

I am not a real estate agent nor do I pretend to be but my experience has been that a seller is more inclined to accept a Conventional loan over an FHA loan because there is a misconception that a Conventional loan is more likely to get approved.  The appraisal guidelines are a little less strict than FHA but that is about it. 

Both loans are good loans but as you will see a Conventional loan is less expensive.  No matter what I would always suggest looking at putting less money down if you do not have a lot of money leftover after closing and if you are not maxing out your retirement.