What’s new in the mortgage market in 2013
By Ilyce R. Glink | Spaces – 22
hours ago
The new year has brought even more
changes to the mortgage market. New and evolving lending standards mean
borrowers need to pay more attention to debt and credit when shopping for a
loan. And even lower interest rates mean homeowners and new home buyers alike
should consider shorter loan repayment terms.
Whether you're looking to buy your
first place or refinance your current mortgage, you'll want to keep these
changes in the mortgage market in mind, as they could mean big differences for
you. Here's what you need to know about this year's mortgage market:
#1. The rules have changed.
At the beginning of 2013, the
Consumer Financial Protection Bureau (CFPB) announced a rule forcing lenders to
ensure that buyers have the ability to repay their mortgages. Under the Ability-to-Repay
rule, all new mortgages must comply with basic requirements designed
to protect consumers. Based on these requirements, lenders will need to issue
what the CFPB calls "qualified mortgages."
Not all of the Qualified Mortgage
(QM) and Qualified Residential Mortgage (QRM) rules have been announced yet -
they will be this year - but they will effectively determine how much legal
liability lenders have when creating mortgages, and they will lock in many of
the tight lending standards we see today. While some borrowers may have a
tougher time qualifying, the new rules create clearer guidelines for lenders
and consumers to abide by.
"There's now more certainty and
when banks have more certainty about what their legal or financial risk is and
have more clarity of what's considered a safe mortgage and what's not, they're
likely to be more willing to write safer mortgages and less willing to write
the mortgages that are deemed unsafe," said Jed Kolko, chief economist at
Trulia.
What it means for you:
If you're looking to purchase a new
home or refinance your mortgage, you'll have to get your
financial life in order. You'll need a hefty down payment, good credit, minimal
debt and the proven ability to pay back the loan with a secure income. Since
banks now have clearer guidelines on what loans are acceptable, they're less
likely to lend to consumers who don't meet these more clearly defined criteria.
Having your finances in order means you're more desirable to otherwise nervous
lenders.
Be sure to consider all your debt
and financial obligations before heading to the bank to borrow or refinance.
Run your credit report, pay down your debts and get all your ducks in a row before
heading to the closing table. That way, you're ready no matter what the CFPB
plans to announce this year.
And whether you're refinancing or
buying your first home, be sure to check with your lender about what paperwork
is required for your loan.
#2. Mortgage rates are lower.
Mortgage rates are even lower than
they were at this time in 2012. At this time last year, the interest rate on a
30-year fixed-rate mortgage averaged 3.87 percent, according to Freddie Mac.
This year, the interest rate on the same loan is averaging a quarter percent
lower.
While it might not seem like much,
this difference means now is the time to lock in your interest rate. If you
took out a $200,000 fixed-rate mortgage at last year's rate of 3.87 percent,
you'll pay a total of $338,366 on the loan – or $138,366 in interest. But
locking in at today's rate means paying $124,520 in interest for the same
30-year loan, a savings of $13,846 over the loan term.
What it means for you:
If you don't want to miss out on low
rates, now is the time to refinance.
"Rates are more likely to go up
than go down," Kolko said. "Because of Fed policy [to purchase
mortgage-backed securities], they're not likely to go way up, but they're
likely to rise if the economy continues to recover." Recent data from the
Congressional Budget Office suggests that mild economic growth will continue
this year, and could mean a slight uptick in interest rates if things continue
moving upward.
#3. 10-year mortgages are readily
available.
Today's near-record-low interest
rates mean many homeowners can afford to take out loans with shorter repayment
terms, since low interest rates offset at least some of the larger monthly
balance. But low interest rates might not be around forever, and missing out
means you'll pay thousands of dollars extra over the loan term.
In 2013, 10-year mortgages are set
to become more popular than ever. According to data from the Credit Union
National Association (CUNA), more lenders are offering 10-year mortgages as
home buyers become more interested in short-term loans, and more homeowners
seek to refinance their current loans.
The shorter 10-year loan term will
save you even more than a 15-year mortgage over time. At an interest rate of
2.5 percent – the rate U.S. Bank was advertising in mid-February for a 10-year
conforming loan – you will pay $226,248 over the life of a $200,000 loan. That's
a savings of more than $98,000 compared with a 30-year loan.
What it means for you:
Shortening your loan term means
you'll save big bucks, whether you choose a 10-year mortgage or a more
traditional 15-year loan. If you're planning to refinance and have equity in
your home, now is the time to take advantage of lower interest rates and put
money in your pocket – instead of the banks'.
"Shortening the term of your
mortgage makes the single largest difference in the interest you pay, even more
than a lower rate," Alice Stevens, chief operating officer at First
Financial Federal Credit Union, said in a press release. When you're paying down a 10-year
mortgage, more of your monthly payment goes to the principal of the loan -
rather than interest - and today's low interest rates mean the higher monthly
payments are more affordable than ever. If you're refinancing a loan you've
been paying on for a while, now is the time to commit to a shorter loan term.
"Many people who are in loans
from five to seven years ago, and have equity in their homes, are paying rates
over 5 percent," said Austin Lampson, loan officer with Medallion Mortgage
Company, in an e-mail. "Because their principal is paid down a bit, and
the rates on a 15-year fixed rate mortgage are low, they can conceivably
refinance into a 15-year for pretty close to what they were paying on a
30-year. This is a win-win because they save in interest, and also reduce the
term they're paying to get rid of their loan."
Joe Caltabiano, senior vice
president at Guaranteed Rate, says shorter term mortgages are best for people
comfortable with the payments. "With low yield on safe investments and
people making only 0.5 percent on their savings accounts, they would rather
take that money and pay down their mortgages faster," he said in an
e-mail.
Talk to your current lender about
your refinance options, and don't be afraid to shop around. This year, keep in
mind what's best for you – and your bottom line.
Ilyce Glink is an award-winning, nationally
syndicated real estate columnist, blogger and radio talk show host, and
managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.