(Photo credit: Thinkstock)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.