20 percent. If you have researched the home loan process, you have likely heard the number 20% and the term “down payment” used in the same sentence.
Conventional wisdom (for the conventional loan program) says that a 20% down payment is required to close on a home loan. For a $400,000 home, the 20% down payment would require $80,000 in cash. This is a large chunk of change, an amount of cash that some buyers are unable – or unwilling – to access.
In reality, the 20% number is simply a guideline. Given the right conditions and the right loan, borrowers can pay as little as 0% down to close on a loan.
In this article, we will go over the low- and no-down payment options for borrowers in San Luis Obispo County, the Central Coast, and California.
Mortgage rates dropped noticeably since our Wednesday (Aug. 13) update. The APR for the 4.125% 30-year fixed rate moved from 4.182% to 4.140, as the rate “cost” fell 5/8 of a point.
You will often hear mortgage pricing discussed in terms of “points.” Like anything you would buy in a store, each mortgage rate has a “price” associated with it, and this price is expressed in terms of “points”. One point is equal to 1% of the total loan amounts. Two points would equal 2% of the total loan amount. And so on.
So a rate dip of 5/8 of a point on a $417,000 loan translates to a dollar value of $2,606.25. In other words, the fictional borrower would pay $2,606.25 less to obtain a loan with a rate of 4.125%. (For a guide understanding mortgage pricing, click here).
Of course, mortgage pricing is more complicated than that, and varies based on the borrower, the property, and the loan. Borrowers can pay extra for lower rates (and a lower monthly payment) or accept a rebate (cash back) from the lender to accept a higher rate, which can be used to cover closing costs or fees.
On any given day, mortgage rates typically move in small, 1/8 point increments in reaction to markets. The fact that our 30-year fixed rate fell 5/8 of a point in pricing is more significant, and has us seeking out answers.
Why Mortgage Rates are Falling
“Rates currently have downward pressure due to geo-political stress overseas, weak Q2 earnings for U.S. companies, and the Fed easing out of quantitative easing,” said Jason Grote, co-owner of Central Coast Lending.
When investors are worried or uncertain, they seek out safer investments. U.S. bonds provide one of the safest havens around, including mortgage backed securities (MBS). More activity (demand) in the MBS market will increase MBS prices and decrease yields… which means lower mortgage rates.
Partially, we are seeing this “flight to safety” help keep mortgage rates low, but to add a bit of nuance, let’s take a look at the 10-year Treasury bond.
The 10-year Treasury bond yield is often used as a point of correlation to the 30-year fixed mortgage rate (read this primer to learn why).
In 2014, the 10-year yield has dropped steadily. Larry McDonald (Forbes) and co-author Robbert Van Batenburg (Newedge) published an excellent article on Forbes explaining why the 10-year Treasury Yield has dropped to 2.40% and below, despite consensus 2014 expectations for something more like 3.44% (a full 1% difference!). This issue is an important one, and helps explain why mortgage rates are so much lower than expected.
There is a lot to say here, but we will pick out a few of the most important points:
1) Flight to safety.
As Grote said, turmoil abroad (“geopolitical risk) has sent investors towards safer investments. The only problem: U.S. Government-backed bonds are one of a shrinking number of “low risk” plays.
The alternative flight to safety assets, such as gold, oil or the dollar, have lost their reputation in recent years, due to their diminished resilience in times of turmoil.
Meanwhile, foreign demand for this safety remains sky-high:
According to U.S. Treasury data, the percentage of U.S. debt held by foreign investors was close to 34% of the United States’ total debt load as of April, 2014 vs 31% at the end of 2011.
The United States economy is exhibiting worrying signs, which reinforces the need for safety:
Measured over the same period in 2013, the US economy grew by a mild 2.4% and is expected to grow this year by 1.7%, which is the lowest GDP growth outside of a recessions year since measurements started in 1930.
2) U.S. Demographics and Politics
The baby boomers are retiring and looking for a place to park their money, and finding the U.S. bond market. Meanwhile, U.S. workforce participation continues to drop:
Today, the US civilian labor force is 155 million vs 154 million in 2007, but the US population has grown from 301 million in 2007 to 318 million this year. Net net, that’s 17 million more Americans with NO change in the size of the labor force.
The authors point out that the aforementioned forecasts that called for a higher 10-year Treasury Yield may have gone off of antiquated expectations for U.S. economic growth:
In developing their interest rate forecasts, it’s like Wall St. is focused on 20th century economic yardsticks in a drastically different post-Lehman world.
There is plenty more to read, including discussion about the effects of financial regulation under Dodd-Frank and Basel III, and the effect that a Republican-led Senate could have on the economy. Read the full piece.
Where Will Mortgage Rates Go?
Moving forward, Grote didn’t foresee any immediate major reasons for mortgage rates to move significantly: “I see rates staying at these low levels for the next couple of quarters.”
The McDonald / Van Batenburg article touched on something important when the authors wrote: “It’s like Wall St. is focused on 20th century economic yardsticks in a drastically different post-Lehman world.” As with the housing market recovery, we are not totally sure what the “new normal” looks like… and we have a ways to go before we find out.
So while buyers might expect rates to remain this low for awhile yet, the economy is more than capable of making unexpected movements. As Grote put it:
“That being said, a bird in the hand is worth two in the bush, so get these low rates while you can.”
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us at 805.543.LOAN or email us here to set up a free pre qualification. We are The Mortgage Experts: ask us anything!
The real estate market on the California Central Coast is extremely competitive, which makes it important for buyers to put together an offer that demands the seller’s attention.
Many of you love travel. I know I sure do. We all work hard and want to enjoy our time off comfortably. In fact, why not pamper yourself?
During the past year, I’ve booked two special trips in very beautiful places. They had great food, accommodations, and wonderful services. I paid about half of the brochure price each time, and would gladly do it again.
Who did I use?
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If you would like to receive a more detailed Mortgage Rate report, you can subscribe to our “CCL Rate Tracker.” The CCL Rate Tracker follows 10 loan programs and publishes three rate options closest to 1 point, par, and 1 rebate for each program every two weeks and delivers the results in an email. To sign up, please email [email protected] with the text “Rate Tracker.”
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When you register for a Loan Center account, you can submit a loan application online and the sensitive information that you provide will be transmitted securely. Your account also enables you to easily modify your loan application and view the status of your loan. Any questions? Call us at 805.543.LOAN or email us here.
About the Loan Programs:
- Mortgage rates assume purchase of a singe-family, detached, owner-occupied, residential property.
- Mortgage rates assume borrower credit score of 760 and a Debt-to-Income ratio of 35%. Rates for conventional loan programs assume a loan-to-value of 80%.
- Loan amount is $417,000 for all programs (appraised value of $522,000), except for the high balance ($561,200 loan and $722,000 value), and Jumbo ($700,000 loan and $1,000,000 value)
- Mortgage rates and APR subject to change.
Home values in the United States will rise 20% over the next four years, according to a panel of housing experts in a recent Zillow-commissioned survey.
The survey asked 104 economists, real estate experts, and investment and market strategists to estimate Zillow Home Value Index gains through 2018. The average response called for a jump of 19.5%.
On average, the prediction calls for home prices to rise between 4% and 5% every year, which would be a slowdown from the double-digit yearly gains that we have seen over the past several years.
A slowdown isn’t a bad thing. Prices have risen to the point that first-time buyers are finding it harder and harder to succeed in the market.
The recent housing market boom occurred because home prices fell to such an extremely low level. The real estate crash caused a flood of foreclosures and short sales. Suddenly the market was overloaded with inventory. Due to economic struggles and job loss, there wasn’t enough demand to sop up the extra supply. Listing prices fell as sellers attempted to tantalize buyers into a deal.
Eventually, prices fell far enough that investors saw the opportunity to “buy low” on properties at prices that were below their true values. Investors helped kick off the boom market, and as the economy improved, single-family buyers jumped back into the fray.
In San Luis Obispo County, home prices have jumped 31% in the past 36 months.
As Trulia Chief Economist Jed Kolko said in a recent article, the hefty jump in home prices after a recession is called the “rebound effect.” The sharp price recovery came as the market rebalanced itself.
Now that home prices are no longer artificially low (indeed, some may be artificially high due to lack of supply), Kolko writes that local housing markets “need to depend more on job growth.”
Last week, we published our mid-year SLO County housing market report. The major theme seemed to be that low supply and rising prices were squeezing middle-income and first-time homebuyers.
One reason for optimism: San Luis Obispo County is pulling it weight in the job side of things, and its unemployment rate is sixth lowest in the state. Another reason for optimism: with demand for housing on the mid- to low-end high and supply low, developers and sellers have incentive to enter the market in that price range. This is simply the balance of supply and demand on the open market.
Still, economic growth (read: job growth) and access to affordable housing will be two major issues for SLO County moving forward. Now that the “rebound effect” is over, home price gains will slow, but prices are already too high for a lot of local buyers. SLO County will need to keep adding good jobs and affordable home options to meet the needs of its buyers / citizens and balance out the housing market.
… have dropped to begin the week. From our update last Wednesday, the 30-year fixed has fallen by 3/8 of a point in cost. We are advertising the 4.125% conforming 30-year fixed rate at an APR of 4.171% (0.375% points), compared to 4.288% (0.625% points) on August 6.
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us today at 805.543.LOAN or email us here to set up a free pre qualification. We are The Mortgage Experts: ask us anything!
In late January, I wrote a weekly tip about the possibility of the stock market having a ten percent correction. The month of January ended up being the first down month for the markets for some time. The month of July was the first down month for the three major US stock markets since January. Though, they were not down by much whatsoever. If you reflect back, we’ve not really had a mildly difficult or even choppy period in the markets in many years. That’s quite unusual.
Alicia DiGrazia, realtor with Re/Max real estate, will be joining hosts Dan and Will Barnaby (filling in for Jason) on Mortgage Matters this Saturday (August 9) on KVEC 920 from 9 a.m. to 11 a.m.. More about Alicia:
I moved to San Luis Obispo County to attend Cal Poly and fell in love with the area. While in college I obtained my real estate license. For the past 10 years I have been assisting buyers and sellers with the purchase of homes, ranches, vineyards and wineries.
If you would like to purchase real estate in the Northern San Luis Obispo County I would love to put my experience to work for you. Please give me a call (805) 591-5216 (office line) or shoot me an email [email protected].
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