Will the Feds Finally Raise Interest Rates?

Time to get a little wonky, guys!

This Thursday marks the beginning of a very important Federal Reserve Open Market Committee (FOMC) 2-day meeting.  What is at stake is something that's been discussed for a couple of years now - will the Federal Reserve finally raise the overnight rate?  The overnight rate is the interest rate at which banks can borrow money from the Federal Reserve, and has not been raised in over 9 years.  This overnight rate has huge implications on the U.S. and global economies, and will directly affect mortgage rates.

As I already mentioned, analysts and bankers have been anticipating a raise in the overnight rate for at least a couple of years, and yet it has not happened.  REALTORs and loan officers have been on pins and needles, worried that an uptick in rates would derail a housing market that has improved markedly since the collapse in 2007.

This is the Fed's last meeting of 2015, and whatever they decide to do will certainly be an indication of what they plan on doing in 2016.  We all know that mortgage interest rates at 4% is not sustainable long-term, and it's just a matter of time before the Fed's start to "correct" what has been the status-quo for nearly a decade.

I think the key takeway is that even if the FOMC decides to raise rates on Thursday/Friday, they will almost certainly go about doing so in a cautious and conservative manner.  So barring something economically catastrophic, we should continue to see VERY affordable mortgage rates for the time being. 

"I Need 20% Down to Buy a House, Right?"

This is easily one of the biggest misconceptions that first time home buyers have when I sit down with them - the belief that, in order to purchase a home, they need to have 20% for a downpayment.  In reality, this is about as far from the truth as possible!  Unless you are buying a 2nd home or planning on using the home as an investment property, buyers absolutely DO NOT need 20% downpayment to purchase a home.

One option that many first time homebuyers choose is an FHA loan.  FHA loans are guaranteed by the federal government and the minimum downpayment is 3.5%, which is significantly less than 20% down.  However, FHA loans have become slightly less desirable over the past couple years because of changes to FHA's mortgage insurance.  Currently, FHA mortgage insurance will never come off of the loan.

An alternative to FHA is a conventional loan.  This is what we typically think of when we hear 20% downpayment loans.  However, most conventional programs allow you to go down as far as 5% downpayment, just slightly above the 3.5% required by FHA.  However, there are times when you can actually go below 5%.  There are specific programs that allow you to obtain a conventional mortgage with 3% downpayment.

So let's review the difference in downpayment required on a $200,000 home.

20% Downpayment Conventional:  $40,000 downpayment required at closing
5% Downpayment Conventional:  $10,000 downpayment required at closing
3.5% Downpayment FHA Loan:  $7,000 downpayment required at closing
3% Downpayment Conventional:  $6,000 downpayment required at closing

No wonder first time buyers think homeownership is unattainable when they believe they will need $40,000+ at closing!  The reality is that 20% is a relic of the past, and most homebuyers are closing with significantly less cash than 20% down.

I work with several fantastic loan officers, so if you have been considering making a purchase but scared that you need 20% down, contact me today and I'll happily put you in touch with one of them!