Welcome to this week’s Illinois Mortgage Rates and News week in review, my take on the week’s financial news and how it affected Illinois mortgage rates.

The great physicist Isaac Newton described gravity by noting, what goes up, must come down. This week gravitational forces were at play in mortgage interest rates. After moving up strongly (and strangely) most of the month, mortgage rates are now falling like the proverbial apple. Mortgage rates jumped up based

on fear of inflation. The strange part of this has been that inflation may be a problem down the road, but the credit crunch and recession are crucial problems now. As Fed Chairman Bernanke said in congressional testimony this week, “You fight the enemy in front of you, not the one over the hill.” Inflation may become a problem, and there are signs of inflation especially in fuel and food costs, but it is harder to raise prices when the economy is slowing down. At any rate, between Bernanke’s testimony (the economy is soft and it could get softer) and some pessimistic economic reports, the focus is off of inflation and this means mortgage rates are heading back down.

New claims for unemployment insurance were up to 373,000. January durable goods orders tanked by 5.3%, much more than expected. Consumer confidence dropped 12 points, coming in at the lowest level in the last 16 years. Consumer confidence is a good indicator of future spending as consumers tighten up their wallets and only spend on necessities when times are tight. The stock market got killed this week, and that meant more money coming out of stocks and into the safety of bonds, including mortgage bonds.

In other mortgage news, The Office of Federal Housing Enterprise Oversight removed limits on the amount of loans Fannie Mae and Freddie Mac can buy.  This will allow them to sell and repackage more loans which adds liquidity to the housing market. As of tomorrow the FHA lending limits are due to increase. The limit will be based on 175% of the median home price for the area. Once it is official I’ll post the details, including the cap for the Chicago area. When I first got into the mortgage business 16 years ago, FHA was one of the few options available for new buyers or those without a big down payment. Over the years they became less and less of a factor. Part of it was their old fashioned guidelines; part of it was that too may first time home buyers bought homes above the FHA lending limit. They’ve already made some moves toward modernization with more on the way. This cap increase will help a lot of people get financing they couldn’t qualify for before.

Conventional wisdom now shows a 70% chance that the Fed will slash rates by another 75 basis points on or before the March 18 FOMC meeting. What does that mean if you are looking to buy a home or refinance your mortgage here in Illinois? Well, the last time the Fed made a big cut, mortgage rates tumbled – for about a day. Then they moved higher. I think there is a good chance that rates will be moving down some more, but once the Fed does its thing again, don’t be surprised if fixed mortgage rates get worse again. If you are thinking of refinancing your current mortgage, get your papers in to your loan officer (or give me a call) and be ready to move. Same thing if you have a contract to buy and are waiting to lock in. Rates are improving now, but there were a lot of people who got left behind while they waited for lower rates the last time. Volatility is still crazy and I expect it will remain that way.

Mortgages rates are much better this week than they were last week, and the trend is going in the right direction. Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.75%       5.823% APR

15 year fixed rate    5.125%     5. 248% APR

5-1 A.R.M.               4.875%     5.179% APR       

7-1 A.R.M.               5.125%     5.267% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.75%       6.862% APR

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines.)

7-1 A.R.M.              5.50%        5.639% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate  5.50%        5.749% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

There are a lot of reports coming out next week, but the biggest market mover traditionally is the jobs report which will be released next Friday.

llinois Mortgage Rates and News.

With the rates on fixed rate mortgages moving higher over the last few weeks, adjustable rate mortgages (ARMs) are suddenly popular again. Right now there is a huge spread between the rate on a 30 year fixed rate mortgage, and a 5-1 ARM, which is fixed for the first five years before it can adjust. The difference in rate now is 7/8s of a point, which is mind boggling huge. On a $300,000 loan this comes out to a savings of $166 per month. This spread means a home buyer here in the Chicago area can save thousands of dollars in payments by going with the adjustable instead of the fixed rate. But the savings come at a cost. By taking on an ARM, you are taking a risk that rates may be higher down the road, and if you are still in your home, and still in your mortgage, your payments would then move up.

Does it make sense to take the risk? If you’ve been following the news, there is lots of talk about the housing slump, and one of the mainstays of these stories is about the dangers of adjustable rate mortgages. There is no doubt that people have gotten in over their heads, and in some cases ARMs have been part of the problem. (A bigger part of the problem might be that they didn’t understand what they were getting into.) ARMs aren’t as dangerous as some think. They aren’t for every person or every situation, but used correctly they can be a great option.

So when does it make sense to choose an ARM?

1. When you don’t expect to be in the house for the long term - Most home buyers go with fixed rate mortgages because they feel safer taking on a mortgage where the rate and payment will always stay the same. But most people don’t stay in their homes for 30 years, especially first time home buyers. With job transfers, changes in life style and upward mobility, it is now common for homeowners to move after five to seven years. ARMs come with fixed periods for the first 5, 7 or even 10 years. Why pay extra for time you don’t expect to be in the home?
2. When you don’t expect to be in the mortgage long term – This one is harder to anticipate, but most home owners don’t keep the same mortgage, even if they stay in the house long term. Interest rates go in cycles, up and down. Refinancing used to be prohibitively expensive. Now no-cost refinancing (we pay all the closing costs by increasing the interest rate slightly) is common. Now if the mortgage rate drops by a half a point it makes sense to lower your payment by refinancing. Mortgages are now looked at as more of a financial planning tool. If you build up equity in your home, you may want to tap into that equity with a new loan. Again, if you think it is likely that you will refinance your mortgage in the next 5 – 7 years, an ARM may be a good option.
3. When you expect that your income will be increasing - This is the case with a lot of first time home buyers. If you are early in your career and expect that your income will be moving up, you are in a position to accept a little more risk that your payment will be higher down the road. By taking on an ARM you are able to take advantage of the savings now, when you need it most.
4. When you want to build up equity quicker – You can use adjustable rate mortgages to build up your home equity or as a way to increase your investment. One way is to pay the same mortgage payment you would make if your loan was fixed. If you did this with the example I used earlier and paid the $166 saving as an extra principal payment each month, you would pay down an extra $14,000, building more equity than you would with the 30 year fixed rate. Another way to approach this is by taking the savings and investing it in an outside investment where you can earn more than the mortgage interest rate. If you plan on doing this, you need to make sure you consistently add to your investment each month.

Those are a few reasons why you might consider an ARM, but for some people adjustable rate mortgages are the wrong way to go. Don’t take an ARM if you meet any of these criteria:

• You plan on staying in the home for at least 10 years.
• Your income is not going up, and you would have trouble making the payment if the mortgage payment goes up when the loan adjusts.
• You can’t afford the home if you don’t use the ARM.
• Taking on the extra risk will make it hard for you to sleep at night.

Whether an ARM is right for you depends on your own personal and financial situation as well as your goals and expectations. But ARMs aren’t something to be afraid of, and for many people they are a great way to save money. If you have any questions, or if you want to go over your own situation and see if an ARM would work for you, let me know.

Are you a first time home buyer in the Chicago area? Or are you someone looking for more information on how to save money when buying a home and getting a mortgage? I’ve put together a free 49 page Home Buyer’s Guide which goes into detail on the entire mortgage and home buying process. Just click on the link to download your free copy.

Illinois Mortgage Rates and News

Do you have an adjustable rate mortgage that is due to adjust this year? If so, you’ve got plenty of company. There are a lot of Adjustable Rate Mortgages (ARMs) resetting this year. I’ve seen estimates as high as one trillion dollars worth – that’s one with twelve zeros behind it! That is serious money, and I’ve read a lot of commentary about how damaging this could be to our economy this year. But if you have an ARM, should you be worried that your interest rates are going to go pop up and make your payment unaffordable? Probably not. Should you rush out to refinance your mortgage? Not necessarily. In a lot of ways ARMs have gotten a bad rap. To see how an ARM reset would affect you, you need to understand how an ARM works.

The most popular versions are what is called hybrid ARMs, these are a combination of a fixed rate and an adjustable. That means they are fixed for a certain time span, 3, 5 or 7 years are the most popular, and converted into a one year ARM after the fixed period ends. So how does your ARM reset? Your ARM changes are based on two things that are set up at the beginning: the index, and the margin. The first part, the index, refers to the financial indicator the rate is based on. Different indexes are used, but they all move up and down based on the strength of the economy. The second part of an ARM loan is the margin. This is set at the closing, and it always stays the same.

So the first step to see what your new rate will be is to add the margin to the index. With the recent Fed rate cuts, all the short term indexes are down sharply. The current 1 year treasury index, a common index in ARM loans, is now around 2.11%. Adding in the margin, typically 2.75%, you get a fully indexed rate of 4.86%. Not a bad rate at all – quite a bit lower than what you could get by refinancing.

But this doesn’t necessarily give you your final rate. There’s one more step. Most ARMS have caps built in to them. Your rate typically can’t increase more than 2% per year, and no more than 6% over the lifetime of the loan. (That’s not the case with all ARMs, so take a look at your mortgage note to make sure.) So if you bought your home back in 2003 with a 5 year ARM, and maybe you bought when rates were near the bottom with the starting rate at 3.75%, if your cap is 2% at the first adjustment, your new rate can’t be higher than 5.75%, even if the fully adjusted rate is higher.

The other thing to keep in mind is how long you plan on staying in your home. If this is your forever home and you want to stay there for the long term, it might make sense to refinance and lock in to the current low rates, even if they are higher than what your adjusted rate would be. If you are going to be there for at least a few more years, refinancing might still make sense, especially if you refinance with low or no closing costs. But if you don’t plan on staying in your home for more than a year or two, you’re better off doing nothing. The current rates are better than your other options, and the worst case scenario isn’t all that bad.

If you have an ARM with a sub prime mortgage your situation will be worse. The margin on Sub Prime loans can be 6%, which means your payment could shoot higher causing real problems. If you have an Option ARM and you’ve been paying just the minimum payment, you owe more now than when you started, and you are on track for some real trouble. In these cases refinancing makes a lot of sense, but with the changes in mortgage guidelines you may find it hard to qualify. But we will talk about that in another post.

Illinois Mortgage Rates

Welcome to this week’s Illinois Mortgage Rates and News week in review, my take on the week’s financial news and how it affected Illinois mortgage rates.

This has been a brutal week in the mortgage bond market. Mortgage rates spiked to their highest point of the year this week before turning around and heading lower on Thursday. But by Friday afternoon the bad old market had returned and we were once again heading in the wrong direction. Brutal. The market trend is a surprise to most consumers. The Fed has aggressively lowered short term interest rates over the last few months, and the general perception is that interest rates are low and heading lower. Short term rates are, but not mortgage rates. The spread between the lowest mortgage interest rate we saw after the Fed made their surprise rate cut last month, and the highest rate we saw this week, is a full point – that is a 1% difference in rate. To give you an example of how this affects home buyers who need financing, on a $200,000 loan this works out to a difference in payments of $127 per month. Brutal.

The mortgage rate volatility raises two questions.

1. Why have rates moved up so much?

2. What direction are mortgage rates heading in now, here in Illinois and throughout the country?

As to the first question, part of it is just market psychology. All markets follow trends. They tend to move in one direction – up, down or sideways – until something happens to make the market shift in another direction. As I have noted before, mortgage bonds love bad economic news, but hate inflation. A few weeks back market psychology reversed from a focus on the soft economy to a focus on the fear of inflation once we get through the soft patch in our economy. The fact that this may be months down the line, and the economy may get worse isn’t a factor now. This is part of the reason that mortgage rates have moved up so sharply. But this is only part of the story. Another part is more complicated. Mortgage servicers, (these are the banks you pay your mortgage to) make their money by collecting and processing your mortgage payments. Any time rates move down the value of their loan servicing portfolio decreases because people will take advantage of the low rates and refinance their mortgages. To protect themselves from the run off in their loan portfolio from too many mortgage refinances, they hedged their positions in the mortgage backed securities markets. This caused rates to move up some, but it got exaggerated as hedge funds jumped on the trade in order to make a quick profit.

This brings us to the second question, where are mortgage rates headed now? The big move higher in interest rates seems close to running its course. The hedging from the big banks doesn’t make sense anymore now that mortgage rates are so much higher, so there is good reason to expect that mortgage rates will settle down some from this factor alone. As far as market psychology goes, mortgage bond traders are notoriously fickle. Right now they are focused on inflation, but that could change quickly. Most economists think that the credit crunch is alive and well, and the economy is a long way from getting out of the woods and escaping a recession. So all it will take is one bad economic report and we could see rates tumbling lower. My crystal ball is still cloudy, but I expect that rates will start to drop again over the coming weeks.

The January Core CPI (Consumer Price Index) rose at a 2.5% annual rate, showing that inflation is alive and well. The news was mixed In the housing sector. January Housing Starts were up slightly, but building permits were at the lowest level since November 1991. This is an indicator of future building and the low number reflects a lack of confidence in the market for new homes.

Fixed rate mortgages rates are again slightly higher this week than they were last week. If you have a contract to buy a home, you may want to consider a long-term ARM. The rates are lower while still giving you the stability of knowing your payment is locked in for a long time (5, 7 or even 10 years). The important thing is to match your mortgage to your financial needs and your life style. A 30 year fixed rate is a great way to go for some people, but you shouldn’t rule out other options. Adjustable rate mortgages can save you money up front, and if rates do drop again, we offer no cost refinancing, so you can lock into a fixed rate later if it makes sense.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    6.125%     6.264% APR

15 year fixed rate    5.625%     5. 748% APR

5-1 A.R.M.               5.125%     5.279% APR       

7-1 A.R.M.               5.25%      5.363% APR

10-1 A.R.M.             5.625%     5.748% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.875%     6.937% APR

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines.)

7-1 A.R.M.              5.75%       5.823% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate  5.875%      6.046% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week the economic calendar is packed with reports – something important is coming out nearly every day - and there are going to be plenty of events that can move the market. Fed Chief Bernanke will be testifying before Congress on Wednesday and Thursday. So again, volatility should be high. If you have any questions, or if I can help in any way, let me know.

llinois Mortgage Rates and News.

Have you filed your taxes yet? Are you writing out a check to the IRS, or getting less of a refund than you expected? If you are still renting, you are probably paying more in taxes than you should. In previous posts I’ve gone over other financial advantages of owning your own home – how you gradually build equity in your home as you pay down your mortgage, and how appreciation can build wealth as your property goes up in value over time. But one of the key benefits of owning real estate, here in the Chicago area or throughout the country, is that paying your mortgage puts a little more cash in your pocket through tax deductions.

Strong communities have high rates of home ownership. Home owners take pride in their homes and protect their investments by taking an interest in their schools, local government and the health of their communities. This means they have established roots and have stronger ties to their community and to the nation. One of the strengths of the United States is that it is a nation of home owners. The Government understands this and encourages people to own their own homes. They do this in several ways, but the most important way is through deductible interest.

Real estate is treated differently than nearly every other purchase in this regard. If you were to get an auto loan to buy a new car, the interest is treated strictly as an expense. The same goes with school loans or purchases on your credit cards. It’s different when you get a mortgage. With a mortgage, all your interest, as well as your property tax, and in many cases your mortgage insurance, is tax deductible.

This means that you may be able to buy your own home for the same amount as you’re paying in rent now. Let’s say you’re paying $1,500 in monthly rent, not uncommon in many areas throughout the Chicago area. How much would that payment afford if you were to buy? The truth is, you can afford a much higher monthly payment when you look at it on an after-tax basis. Here’s how this works:

Let’s say you were to buy a $250,000 home with a 5% down payment, on a 30 year fixed mortgage at 6.0% over 30 years. If you are buying in the Chicago area it might look something like this:

$250,000 purchase price / $237,500 mortgage

$1,423 Principal and interest

400 Taxes

50 Insurance

154 Private Mortgage Insurance

$2,027 Total payment

Of your mortgage payment (principal and interest), $1,187 is the interest portion. Add that to what you paid for the real estate taxes and mortgage insurance you get $1,741. This is the amount that you base the tax deductions on. How much of a benefit you get, depends on your tax bracket. If you are in the 30% tax bracket, it looks like this.

$1,741 Interest + Taxes + mortgage insurance

x30% Tax Bracket

$522 Tax Savings

Now subtract the tax savings from your full mortgage payment.

$2,027 Total monthly payment

-$522 Tax Savings

$1,504 Effective Rent

In other words, a rent payment of $1,500 is equal to a mortgage payment of over $2,000. This is a great benefit for first time home buyers, or anyone buying a home, and when combined with appreciation and equity build up, an example of why real estate ownership is such a great financial investment.

Are you a first time home buyer in the Chicago area? Or are you someone looking for more information on how to save money when buying a home and getting a mortgage? I’ve put together a free 49 page Home Buyer’s Guide which goes into detail on the entire mortgage and home buying process. Just click on the link to download your free copy.

Illinois Mortgage Rates and News

Welcome to this week’s Illinois Mortgage Rates and News week in review, my take on the week’s financial news and how it affected Illinois mortgage rates.

Wow! It doesn’t seem all that long ago that mortgage rates were dropping and it looked like we were going to test the all time lows of a few years back. Actually, it wasn’t that long ago, though 3 weeks in this kind of market can feel like forever. Markets move on sentiment. When things are good they are unbelievably good, and the future couldn’t be rosier (Do you remember the term ‘irrational exuberance’?). On the other hand, when fear is in the air you better be careful or you’ll get trampled by the herd as they run toward the nearest cliff. That’s where we are now. Mortgage interest rates are getting down right ugly (comparatively, anyway). Fixed rate mortgages jumped to their highest point of the year this week.

So what happened to change market sentiment so sharply? Is the economy back, running at full steam again? Was all the talk of the coming recession nothing more than a bad dream? Are home buyers flooding the real estate market? The answers are – I don’t know, no, no and no. We still have the same issues to face that we did a few weeks ago. The economy isn’t on the verge of a roaring comeback, but mortgage bond traders are now looking past the recession, and seeing a future where inflation is raging. As I’ve written about before, bonds hate inflation. Inflation erodes the value of a bond or mortgage, paying their return back in cheaper dollars. So even a hint of inflation is a problem, and with the rate cuts the Fed has already made, along with future cuts it is prepared to make, and the money dump from the stimulus package, inflation down the road is a concern.

This creates a conundrum of sorts. In order to get the economy moving again, we need to stabilize the real estate market. Low mortgage rates would help, but the rate cuts are now looked at as inflationary, so mortgage rates rise, putting more of a crimp on the housing market and consumer sentiment. It will be interesting to see how this all is resolved. The one thing I do know is that we are still in a credit crunch, and market volatility is higher than ever. The trend now is for higher mortgage rates, but this could change quickly. All it might take is one bad economic report, some unexpected news or even a comment made by Fed Chairman Bernanke, and rates could be shooting back in the other direction.

All the data coming out this week showed more evidence of a slow economy. Industrial production was down and a measure of consumer confidence hit a 16 year low. Several big bond insurers moved one step closer to the crisis stage, needing more capitalization or they will be downgraded from investment status. The president signed the stimulus package into law so we will have checks on the way in the next few months. The Bush administration along with 6 of the major mortgage loan servicers announced a new program to help borrowers who are behind in their mortgages. Called Project Lifeline, it will give borrowers who are 90 days behind in their payments a 30 day break from the foreclosure process, giving them a chance to renegotiate new terms with their lender. Whether this is a real lifeline or not is open for question. The last bail out plan they announced to great fanfare went nowhere. This could be more of the same.

Fixed rate mortgages rates are higher this week than they were last week. But rates for adjustable rate mortgages have stayed the same or improved. The yield curve, the difference between short term rates and long term rates is suddenly huge. This means that for many people, adjustable rate loans may make sense. You are taking more of a risk if you go with an adjustable rate mortgage, but there are ARMs that stay fixed for up to 10 years, which is a long, long time. If you aren’t planning on being in your home that long, or even if you are, the difference between the 30 year fixed and the 10 year adjustable is a half a point – it’s worth a look.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    6.00%      6.174% APR

15 year fixed rate    5.50%      5. 642% APR

5-1 A.R.M.               5.00%      5.187% APR       

7-1 A.R.M.               5.25%      5.363% APR

10-1 A.R.M.             5.50%      5.642% APR

For Jumbo loans over $417,000

30 year fixed rate *  6.75%     6.849% APR

(*We have one lender at 6.125% - if you meet their guidelines.)

7-1 A.R.M.               5.75%     5.823% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate    5.75%     5.928% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week’s biggest report will be the Consumer Price Index (CPI), released on Wednesday. Inflation is the fear, so this will be watched closely. Housing Starts and the minutes from the last Fed meeting, two other potential market movers, will also be released on Wednesday. There are other reports due next week, and whichever way they turn out, I expect the market will be volatile. Let me know if I can help in any way.

llinois Mortgage Rates and News.

It’s all about commitment. If you are a first time home buyer - that is, if you are thinking about becoming a first time home buyer but you are renting now - this is a big step. You probably have some serious commitment issues.

Renting is a casual fling. You probably like the place you live in now. Maybe it has a pool and a rec-center that you’ve been meaning to use, but never find the time. Maybe it’s in a great location, close to work and in an area with a good night life. For one reason or another, the place has its charms. It was just what you needed when you first moved in. But now… now, it seems constraining. Maybe even childish. You’ve outgrown it.

Not only have you outgrown it, but you have friends who have taken the big step and bought a place of their own. This seems like the grown up thing to do, and you like the idea of having a real place of your own, too. Maybe you envy the little touches they’ve made to personalize their home. You would like to make your home more of a reflection of your personality and taste, but it’s a rental. You can only do so much.

And then there is the money aspect. Owning your own home has always been the best way to build wealth. You know there are tax savings, and maybe you know someone who struggled to come up with the down payment for their first home, and a few years later they had enough equity saved for a big down payment on a new, nicer house. That doesn’t happen when you rent.

But still, there is the commitment issue. Buying a home seems so… permanent. Maybe not permanent for that house, but once you buy a home, you know your days of renting are over. And besides, the market is awful, and it doesn’t make sense to buy when all you hear is bad news. Maybe renting isn’t where you want to be for the rest of your life, but at least you know what to expect.

This could be a great time to buy. Prices are the lowest they’ve been in years, interest rates are low and there are a lot of great programs to help first time home buyers buy their first home. You know there is a great house for you somewhere, the love of your life, maybe. You will know it is right as soon as you see it - love at first sight?  But commitment is a scary thing and you don’t want to make a mistake. So for now, you continue to write rent checks to your landlord.

Still, late at night when all is quiet, do you find yourself looking at home sites on the Internet, or paging through old home listing magazines, wondering what might be?

Happy Valentine’s Day – Illinois Mortgage Rates and News

If you are a first time home buyer thinking of buying a home here in the Chicago area, you are probably asking yourself, why would anyone want to buy a home in today’s market? Fear is in the air and it is a scary time to buy. The news is filled with talk of foreclosures and declining markets. Although the Chicago area has remained stable, real estate prices have fallen sharply in many areas of the country. If you buy a home now, how do you know that prices won’t fall lower? The truth is, you don’t. But if you have good reasons to buy (You need more space, growing family, moving up in your job … whatever, you know your reasons), and you are planning for the long term, now could be a great time to buy a home here in the Chicago area.

Mortgage rates are low now and you have your choice of homes to buy. But there are some crucial benefits of buying real estate that go beyond the current market conditions. In an earlier post I talked about the first financial benefit of owning a home, how you gradually build equity by paying down your loan. A more dramatic benefit of owning a home is property appreciation. Over the years, home prices have risen steadily in the Chicago area and throughout the country. Even now, with the market slower, it still costs tens of thousands of dollars more to buy a home in the Chicago area than it did just a few years ago. Home prices could fall lower, but if you look at long term trends, real estate usually goes up and chances are that homes in the Chicago area will cost a lot more 5 years from now than they do now.

So how does appreciation work for you? Here’s an example. If you buy a home for $300,000, and the market appreciates, that is the property values increase, by 3% per year (Appreciation doesn’t move in a straight line. It may be 0 one year and 5% the next.), at the end of 5 years your home will be worth over $347,000. At the end of 10 years it would be worth over $400,000.

In this example, you have increased your equity by nearly $100,000 while living in your own home. There’s no guarantee of what home values will be in the future, but this is what has happened throughout the Chicago area in the past.

Let’s take this a step further. Let’s say you bought this same home for $300,000, but that you took out a mortgage for 95% of the purchase price, or $285,000. Let’s say that the mortgage was a 30 year fixed rate with an interest rate of 6.0%. Because your mortgage principal balance goes down over time, at the end of the tenth year your mortgage balance will be paid down to $238,500. If, through appreciation, the value has grown to $400,000, your equity is now worth over $165,000. Not bad for an investment of only $15,000.

Appreciation is the reason so many people are able to move up to a larger house. Having the extra money to use as a down payment, gives you the buying power to buy a larger home for your growing family, or maybe the chance to move into your dream home. Appreciation is one of the key benefits of homeownership, but the key here is that you need to allow time for it to work.

The market has slowed down recently and those who bought a home in the last year or two, haven’t seen much of any appreciation, and in some areas the prices have fallen. Time is the factor here. Real estate isn’t an investment you jump in and jump out of. It takes time to see all the benefits and when you buy a home you should plan on keeping the home for several years, minimum.

With prices down, this could be an opportunity. Historically, the real estate market has always moved higher. It may take some time before prices start rising again, but there are always new buyers coming into the market, through birth and immigration. The demographic push means that real estate prices will rise over time.

But owning your own home is a great investment even if prices stay flat. Tax advantages from owning your own home means the government is helping you to pay for your mortgage. I’ll go over this in a future post.

Illinois Mortgage Rates and News

Have you heard of the Law of Unintended Consequences? The idea that when you try and do something good, something entirely unforeseen results from your actions? This is a variation on Murphy’s Law, whatever can go wrong, will go wrong. I think we are seeing a great example of this in the financial markets. Conventional wisdom now tells us several things about the economy:

1 – Our economy is almost surely now in a recession.

2 – The recession is largely a result of all the problems in the real estate market.

3 – In order to get our economy back on track, we need to get the real estate market moving again.

4 – One of the best ways to get the real estate market moving again is through lower interest rates.

Makes sense, right? The Fed has moved aggressively to cut short term rates – cutting an astounding 1.25% in just over a week. In addition, the Congress has rushed a new stimulus plan through both houses. All this action surely means mortgage rates will drop and get the real estate market moving again. Right?

Maybe not.

The mortgage market is still in its up and down mode, but Thursday the mortgage backed securities market got clobbered, sending mortgage rates higher. Rates recovered some on Friday, but I think this is a taste of the problem we are dealing with, and this may be a bigger problem going forward. In a speech, Atlanta area Fed Governor Richard Fisher warned that aggressive rate cuts may ‘juice up’ inflation. The mortgage bond market hates any thought of inflation, and this prompted the sell off. Remember, a slowing economy is good news for mortgage rates. The worry here is that so much money flowing into the economy will spike inflation higher, lowering the value of mortgage bonds. If you have an adjustable rate loan, this may help on your reset, but mortgage rates could spike higher even as short term rates fall. Which brings us back to the law of unintended consequences – even as the Fed and the Government try to revive the economy they could do more damage to the real estate market.

Despite the fears of inflation, the big economic news this week showed more weakness. The January ISM survey (a measure of health in the service industries) plunged much more than expected to a reading of 41.9% - under 50 means the economy is contracting. January retail sales were the worst in years and among the signs of the times, Wal Mart reported that shoppers were using holiday gift cards to buy basic necessities, not electronics or toys – a sign that those on the lower rungs of the economic ladder are feeling the pinch bad.    

In real estate related news, the Senate passed the stimulus package and it should be signed into law next week. One of the provisions calls for a temporary increase in the max loan limit for conforming loans, from $417,000 currently, to 125% of the median income for the area. This will help the distressed markets on both coasts the most, but, depending on how they interpret this, it could help some home owners and home buyers here in the Chicago area. There is also talk of lifting the FHA limit up into the Jumbo price range. I’ll have more on this as details are released.

Buying a Home in Chicago just got a little more expensive. The city approved a hike in the transfer tax from $7.50 per $1,000 to $10.50 per thousand, effective April 1^st. That means if you buy a $300,000 it will now cost you $3,150 in tax. Again, if the market is slow, doesn’t it make sense to not make it harder for people to buy?

Mortgage rates are slightly higher this week than they were last week. It would have been worse but the market rallied strongly today. If you are thinking of refinancing you still may have opportunities. I’m recommending that people get their paperwork together and be ready to go. Rates may drop, but there is no guarantee that they will stay down for long. With all the volatility, it pays to pick the right time to lock your rate in. If you don’t have a loan officer you work with, give me a call.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.75%      5.814% APR

15 year fixed rate    5.25%      5. 372% APR

5-1 A.R.M.               5.00%      5.187% APR       

7-1 A.R.M.               5.125%    5.263% APR

For Jumbo loans over $417,000

30 year fixed rate    6.25%        6.34 9% APR

7-1 A.R.M.               5.875%       5.923% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate    5.50%       5.718% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week a new batch of indicators will be released and I fully expect that some unexpected developments will come out of left field and shake up the market. Volatility is the norm now, so I expect more next week and in the weeks to come.

Illinois Mortgage Rates and News.

As we head into the Spring home buying market, first time home buyers in the Chicago area and throughout Illinois will be making their first tentative steps toward buying a home of their own. It’s conventional wisdom that buying a home makes sense, even now with all the bad news on the housing front. But the question is, does owning a home make sense for you? Some of the reasons you might want to buy are more intangible but emotionally compelling - the pride of having a place of your own, a chance to establish your roots, the joy of having a real home where you can express your own personality and style. These are real reasons for buying your first home. But the some of the best reasons to buy may be financial. In fact, buying a home may be the smartest financial decision you will make in your lifetime.

You know some of the reasons to buy, rates are low and it is a buyer’s market. But the reasons to buy a home go beyond that. If you are a first time home buyer, thinking about buying your first home, you need to know what the advantages of buying are, and how buying a home compares to renting. There are three prime financial benefits of home ownership:

Principal reduction

Appreciation

Tax Advantages

Let’s look at principal reduction. First of all, a quick explanation – with most mortgages each payment is divided into two portions, principal and interest. Interest is the lender’s profit, the amount they charge for the use of their money over the time you hold the mortgage. Principal is the amount of the mortgage you are paying back each month.

Interest is charged on the outstanding loan balance each month. This means that in the beginning years, you are paying mostly interest. But with each payment you make you pay off a little more of the principal, and the loan balance goes down a little more each month. This doesn’t seem like much at first, but it adds up over time.

Let’s say you borrow $200,000 with a fixed rate mortgage at 5.75% interest over 30 years. That means your mortgage payment each month is $1,167. On your first payment, about $958 will go to pay the interest, and just over $208 will go toward the principal, or paying back the loan. That means after one payment, your loan has been reduced by $208 to $199,791. The next month’s payment is based on 5.75% of the new balance, so your interest portion goes down, and the principal payback goes up a little more.

Each month a little more of your payment goes toward reducing your principal, and you pay little less toward interest. If you stay in this house, and this mortgage, for the whole 30 years, you will off the entire mortgage and you will own the home free and clear.

In the early years, you are paying off mostly interest, and chances are you won’t be in that same home 30 years from now (Even if you are, odds are you won’t be in the same loan. Refinancing your mortgage is a way to tap into the equity you’ve built up). Principal reduction is a benefit, but there are other, bigger, advantages to home ownership.

I’ll cover these benefits of owning in my next posts.