In the coming weeks there are several changes that are going to affect the costs for home buyers.
First, the Federal Reserve Board mortgage backed securities (MBS) purchase program will expire. This program has kept home interest rates artificially low for over a year. The purchase program will be concluded by the end of March.
There is a wide range of expectations in the investment community about the impact of the end of the MBS purchase program on mortgage rates. The Fed has been purchasing roughly 75% of new MBS issuance, and a decline in demand from one source normally leads to higher yields to attract other buyers. One argument, however, is that the end of the program has been expected for quite a while, so mortgage rates already reflect the news, and there could be little reaction over coming months. Other analysts predict an increase in mortgage rates of as much as one percent. The Fed itself expects a small increase in mortgage rates as a result of the end of the program.
Second, the office of Housing and Urban Development will be implementing a couple changes this spring that will have significant effect on closing costs for those buyers acquiring a Federal Housing Administration (FHA) backed mortgage.
On April 5 the cost of required up-front mortgage insurance for FHA loans will increase from 1.75% to 2.25%. For a borrower purchasing a $155,000 home with a 3.5% down payment, the up-front mortgage insurance will increase $747. This amount will not make a huge impact on the monthly payment, however it is still an increase in cost to the borrower both at closing and monthly.
Furthermore, later this spring, the amount of money a seller can contribute from their proceeds to the buyer in the form of points or closing costs is going to be reduced from 6% to 3%. This can increase the amount of cash a buyer will be required to pay out of their own pocket at closing.
The best way to avoid these increases in costs is to have your FHA mortgage applications submitted to your lender by the end of March. If you have any questions, please feel free to call me at 701-238-2582.