Good morning Travelers.
Like you, I awoke this morning to hear that the Federal Reserve has raised the interest rate again - for the fourth time this year.
Reading an article on CNN Business, they say:
The Federal Reserve approved a fourth-straight rate hike of three-quarters of a percentage point on Wednesday as part of its aggressive battle to bring down the white-hot inflation that is plaguing the US economy.
The supersized hike brings the central bank’s benchmark lending rate to a new target range of 3.75% to 4%. That’s the highest the fed funds rate has been since January 2008.
Wednesday’s decision, which comes at the end of a two-day policy meeting of the Federal Open Market Committee, marks the Fed’s toughest policy move since the 1980s and will likely deepen the economic pain for millions of American businesses and households by pushing up the cost of borrowing even further.
All last year, I had many of you buying readings on selling and buying property, and while everyone on Earth is under the influence of Uranus in Taurus - buying and selling property is a nerve-wracking event. The markets have gone up and down but now with the fourth straight rate hike, it not only means higher mortgages, but higher rental rates.
There is a housing shortage all over the world. There is an affordable housing shortage all over the world. And now that the Covid rental moritorum is over, this means that there will be lots of people losing a place to lay their heads. Surely many of us remember the Global Financial Crises of 2007-2008: Ireland’s ecomony fell off, Greece defaulted on its international debts, Portugal and Spain suffered from severe unemployment. Each nation’s experience was different and complex. This was not that long ago and I fear that we humans tend to have a short memory.
If you want to purchase a home here in the States, your mortgage will now be double what it may have been if you had purchased earlier. And herein lies the rub: so many people were desiring to buy a home, that some (with more money) were able to offer $10,000-$20,000 over the asking price. Again - most people were priced out.
My real estate agent said he had a couple pay $40,000 over the asking price on house he was selling and knocked the other offers to buy, off the table. And this was not just happening in the States. I had some clients from Europe with the same story - going to buy a home and someone else out pricing them.
Now with today’s rate hike - you’re looking at 7.8% interest. Even loans through the Veterans Administration now have a 7.4% interest rate. Using Jessica Adam’s astrology, I purchased my house in 2019 with at 2.5% interest - locked in. Had I refinanced when the lenders called ( and they call ALL. THE. TIME.) I’d probably be looking at 4% now.
But what is “interest”? Intrest is the amount of money a lender or financial institution receives for lending money. In other words, it is a fee. Charged every month until the debt is paid off. This applies across any financial product available - personal loans, car loans, mortgages and credit cards - even store credit cards like Macy’s.
Before buying a loan, you might want to know what your DTI (debt-to-income ratio) really is (this is where keeping track of every dollar becomes very important).
What Is Debt-To-Income Ratio?
Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on paying off debts versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pre-tax income.
When you apply for a mortgage, you’ll need to meet maximum DTI requirements so your lender knows you’re not taking on more debt than you can handle. Lenders prefer borrowers with a lower DTI because that indicates less risk that you’ll default on your loan.
Your lender may look at two different types of DTI during the mortgage process: front-end and back-end.
Front-End DTI
Front-end DTI only includes housing-related expenses. This is calculated using your future monthly mortgage payment, including property taxes and homeowners insurance as well as any applicable homeowners association dues.
Back-End DTI
Back-end DTI includes all your minimum required monthly debts. In addition to housing-related expenses, back-end DTIs include any required minimum monthly payments your lender finds on your credit report. This includes debts like credit cards, student loans, auto loans and personal loans.
Your back-end DTI is the number that most lenders focus on, because it gives them a more complete picture of your monthly spending.
So tracking your spending, paying down your credit cards and loans and making a budget can put you in a better position when it comes to buying a home and there won’t be any suprises during the process.
MORTGAGES
What Is A Mortgage (basic definiton): a mortgage is a loan taken out from a lender to help you buy a house.
Debt Type: Mortgages are secured because the lender can force the sale of the house through a foreclosure if the homeowner defaults (stop paying) on the loan. A mortage is also non-revolving debt because the mortgage is one lump sum borrowed to purchase the home.
Usage: As of 2021, fourty-two percent of households in America have mortgages, with a median monthly payment of $1595 and an average mortgage-debt per household of $202, 454. (US Census Bureau 2019)
Types of Mortgages:
Fixed Rate - A fixed-rate mortgage is a home loan option with a specific interest rate for the entire term of the loan. Essentially, the interest rate on the mortgage will not change over the lifetime of the loan and the borrower's interest and principal payments will remain the same each month.
With this type of mortgage, even fluctuations in the market will not have an impact on the rate. Because of this, these types of home loans are the most popular mortgages in the U.S.
Conventional Loans - Conventional mortgages are the most common type of mortgage. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.
You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%.
However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).
Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.
Pros Of Fixed-Rate Mortgages:
Monthly payments don’t change over the life of your loan, making it easier to plan a budget.
Cons Of Fixed-Rate Mortgages:
You may end up paying more in interest over time if the rates are high.
Home Buyers Who Might Benefit:
Buyers that are purchasing or refinancing their forever home.
Adjustable-Rate Mortgages
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.
You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 5, 7 or 10 years. If you sign on for a 5/1 ARM loan, for example, you’ll have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than 30-year fixed rates.
After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.
ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For instance, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.
Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.
These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.
Pros Of Adjustable-Rate Mortgages:
Gives lower interest rates for the initial introductory period.
Cons Of Adjustable-Rate Mortgages:
If the rate increases, it can dramatically increase your monthly payments.
Home Buyers Who Might Benefit:
Those who are purchasing a starter home and don’t expect to live there for the loan’s full term.
Government-Backed Loans
Government-backed loans are insured by government agencies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default on your mortgage. You may qualify for a government-backed loan if you can’t get a conventional loan.
Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or down payment requirements, depending on your eligibility.
FHA Loans
FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan, you may be able to buy a home with a credit score as low as 500, if you pay at least 10% down.
USDA Loans
USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan.
VA Loans
VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan. And typically, the funding fees are waived.
Pros Of Government-Backed Loans:
It is possible to save on interest and down payments, which could mean reduced closing costs.
There are less strict qualification requirements than conventional loans.
Cons Of Government-Backed Loans:
You must meet specific criteria to qualify.
Many types of government-backed loans have insurance premiums (also called funding fees) that are required upfront, which can result in higher borrowing costs.
Home Buyers Who Might Benefit:
Those who don’t qualify for conventional loans or have low cash savings.
Jumbo Loans
A jumbo loan is one that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. The conforming loan limit in most parts of the country is $647,200.
Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.
Conforming loans are mortgages that meet Fannie Mae and Freddie Mac guidelines. Conforming lenders underwrite and fund the loans and then sell them to investors like Fannie Mae and Freddie Mac. Once securitized, the loans are sold to investors on the open markets. Because of their liquidity and the government regulations, conforming loans often have lower interest rates than non-conforming loans.
Conforming loans have slightly stricter guidelines, but you’ll pay mortgage insurance (if applicable) for a shorter period and save more money over the life of the loan.
Pros Of Jumbo Loans:
Their interest rates are similar to conforming loan interest rates.
You can borrow more for a more expensive home.
Cons Of Jumbo Loans:
It’s difficult to qualify for, typically requiring a credit score of 700 or higher, significant assets and a low DTI ratio.
You’ll need a large down payment, typically between 10 – 20%.
Home Buyers Who Might Benefit:
Those who need a loan larger than $647,200 for a high-end home, have a good credit score and low DTI.
HELOCS (Home Equity Line of Credit)
A HELOC is when you borrow on the equity of your home. The equity is the difference between what the house is worth and what you STILL owe on the mortgage. But, when you get a HELOC, you’re giving up the equity you’ve earned and trading it for more debt because when you apply for a HELOC, your loan is refinanced and sometimes at a higher interest rate.
Usage: There are more than 4.7 million HELOCS (totaling $349 Billion) in America and the average American household with this type of debt owes approximately $73,685. (US Census 2019). Most people will get a HELOC when they want to remodel their homes.
Debt Type: HELOCS are revolving debt because it is a “line of credit” *AND* your home can be taken away if you don’t pay on your HELOC as it is a secured debt.
Interest: Fixed interest rates on HELOCS are SUPER RARE - so if you get one, expect the rates to go up at lender’s whim.
Before buying your home, do your research, ask questions and make sure that you meet all the requirements necessary for the type of loan you want to use to purchase a home or piece of property.
In part three of this article, we’ll take a look at the Credit Debt Snowball I showed you in part one. This is where it will all come together if you’r diligent.
Until then.
Be Good To Yourselves.
Tara, xx
While I understand that this article is geared mostly toward American homebuyers, there are still things contained that can help you in the European market.
Ask questions: how is the loan structured; what is needed to qualify; interest rates, additional fees, how does the process work, etc.
Arm yourself with knowledge before going in and ask as many questions as you can think of.
Glad you found it useful. Buying a home is the largest purchase anyone will ever make in their lives.
Knowing the different options, the requirements and how the loans are structured is great information to have. Knowing what credit score rating helps to understand what needs to be done to qualify.
I would add to this, having a reputable real estate agent is also key. Ask friends and family about their agent experience and choose from that list. My real estate was/is GOLD. I can call him up now with a question and get an answer within a day - 3 years after purchase.