Interest rates drop below 4%

Have you heard?

Written by: Elizabeth Porter

Mortgage interest rates fell below 4% for the first time in history this week, dipping to rates even lower than the 1950's.  Since the 3.94% mortgage interest rates were published, the internet has been buzzing with everyone from Bloomberg to The Wall Street Journal reporting the plunge. 

At the same time, FHA loan limits have changed and some 100% financing options are disappearing from the market.  If you are in the market for a new home you are probably asking what all this means for you.   

 

Mortgage interest rates are low but what does it mean for buyers?

You've heard the buzz about mortgage interest rates but what does it all mean?  First, let's discuss how and when mortgage rates are published.

The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac is one of America's biggest buyers of home mortgages.  Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership.  Each week Freddie Mac updates their Primary Mortgage Market Survey® (PMMS®) by surveying lenders on the rates and points for their most popular mortgage products and then uses the information gathered to determine average rates across the nation.  These average rates are published every Thursday. 

When this week's rate of 3.94% came out, the world noticed.  All previous mortgage rate records were broken as this week's interest rates dropped below levels only previously seen in the 1950's when rates slipped to around 4% for a couple of weeks.

Now that you know how the published rates are determined, let's look at other factors that are also impacting your purchasing power

altFHA limits- FHA loans are a popular option for buyers largely in part to the low down payment requirement of 3.5%, however, FHA limits restrict the size of mortgages that can be insured by the Federal Housing Administration (FHA).  On October 1, 2011 mortgage loan limits in many areas were lowered by FHA.  For example, in Manatee County Florida maximum loan limits were reduced by more than $157,000 taking maximum loan amounts from $442,500 to $285,200.  This huge drop is highly likely to increase competition for home shoppers.  Why? As FHA loan amounts are lowered, it forces home buyers to search for lower priced homes and thrusts more people into competing for similarly priced homes. 

The alternative to searching in lower price ranges is that shoppers maintain their current price range and save the extra money needed to offset the difference between the higher priced home and the lower loan limits but this is a highly unlikely option due to the risk of mortgage interest rates rising faster than the extra money can be saved. 

USDA- In addition to lower FHA loan limits, 100% financing options are also changing.  One popular 100% financing option is through the United States Department of Agriculture (USDA).  On October 1, 2011 USDA rolled out changes that will impact prospective home buyers with adjustments to their up-front and monthly fees.  There have also been new geographical changes proposed that will eliminate many popular housing areas from USDA eligibility.  These changes further increase competition amongst buyers.  As guideline changing dates approach it  creates an almost “countdown” effect for buyers rushing to beat the deadlines. 

If I am in the market for a home, what should I do?

If you are in the market for a home, consider that with time comes change.  The amount of quality inventory has dwindled and with recent changes in mortgage interest rates and guideline changes from FHA and USDA, there are now more home shoppers being forced into the same price range that you are searching in.  It is a good time to evaluate if you are home browsing or home buying

There is little chance there will be a substantial decrease in home prices based on the recent factors in the financing world.  If anything, these finance changes are what sellers have been waiting for to stimulate home sales.  Rates can only be this low for so long, once they’re up, they’re up and you have missed the opportunity.

The Jones Family is now looking in the same price range you are and they are felling the anxiety to buy before more changes come down the pipeline and limit their selections.  By the time the news reports that its no longer a buyers market, prices have gone up, interest rates have gone up and your window of opportunity has closed. 

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