The 2015 Mortgage Outlook

by Jason Porterfield

Helping First-Time Buyers

Mortgage debt still makes up the largest portion of what the average household owes. The financial website NerdWallet’s Dec. 2014 report stated that the average U.S. household consumer had mortgage debts of $155,192, compared to $15,611 in credit card debt and $32,264 for student loans. In total, households owed $8.14 trillion for mortgages.

The Mortgage Bankers Association is anticipating that mortgage originations will reach $1.19 trillion in 2015, representing a 7 percent increase from 2014. Purchase originations are expected to increase from $635 billion in 2014 to $791 billion, while refinancing originations will drop from $471 billion to $457 billion. The association based its prediction on its estimate that the U.S. economy will grow by 2.9 percent in 2015, backed by strong consumer spending and business investment. The MBA also predicted that employment would grow by 220,000 each month through 2015, and that the Federal Reserve would keep interest rates near zero until the middle of the year.

A healthier housing market that brings in more consumers means a greater number of first-time homebuyers. Those in Illinois can take advantage of mortgage assistance offered through the Illinois Housing Development Authority. The rates for some IHDA mortgage options are slightly higher than the national average. Rates for FHA, Veterans Administration and the U.S. Department of Agriculture are 3.625 percent under the state’s Welcome Home Heroes, SmartMove and SmartMove with MCC programs, or 4.125 percent for two other SmartMove options and for Fannie Mae loans for those who qualify for Welcome Home Heroes, Smartmove and SmartMove with MCC. Fannie Mae rates for the SmartMove Trio and SmartMove with Down Payment Assistance are 4.75 percent.

To qualify for the SmartMove 30-year fixed-rate mortgage option, borrowers must be first-time buyers or veterans, buy a one- or two-unit property in Illinois, use it as a primary residence and put down either 1 percent of the purchase price or $1,000 (whichever is greater). SmartMove with MCC is available for first-time buyers and includes a federal tax credit to reduce tax liability by up to $18,000 over the life of the loan. Buyers can also use it to refinance their property. SmartMove Plus is open to both first-time buyers and those who already own a home. SmartMove Trio is for first-time buyers or veterans and provides the $18,000 tax credit and up to $6,000 in assistance toward making a down payment. The Welcome Home Heroes offering for honorably discharged personnel and first-time buyers on active duty provides $10,000 in down payment assistance and the $18,000 tax credit.

New guidelines set by the Federal Housing Administration will lower the amount of interest paid by consumers on its loans. The FHA insures mortgages with down payments as low as 3.5 percent and had raised the cost of its premiums to 1.35 percent in 2013. Instead, borrowers will face premiums half a percent lower at 0.85 percent. The change may not put much more cash in the pockets of borrowers – it will save them about $25 a month on a 30-year, $100,000 mortgage – and will not affect loan origination. The change could bring in some new borrowers, but other low-cost options are available, and the savings are so minimal that they probably won’t be enough to sway a potential homebuyer (these changes are detailed in our sidebar, “What To Know About FHA’s Recent Changes,” on page 17).

However, a fact sheet offered by the White House suggests that the average first-time homeowner could save as much as $900 on their annual mortgage payment, while homeowners who refinance through the FHA will see similar savings. The White House also estimates that the lower premiums could help as many as 800,000 homeowners reduce their monthly mortgage costs and allow another 250,000 prospective homebuyers to make a purchase. The FHA’s rates are still above historic norms, and the agency is projected to add another $7 to $10 billion in capital reserves.

While offering the reduced premiums, the FHA will maintain its standards for issuing loans. To meet the minimum qualifications for a 3.5 percent down payment, borrowers need to have a credit score of at least 580. Those with credit scores between 579 and 500 must make a 10 percent down payment. Borrowers also may be subject to debt requirements for HUD loans, and a borrower’s debt load should be less than 43 percent of their monthly income. Lenders also have the discretion to overlay their own requirements and reject a borrower, even if they meet HUD’s qualifications.

Mortgage rates stayed low throughout 2014. Some market watchers are expecting them to rise slightly, but they actually fell sharply in the first week of 2015. Freddie Mac’s Primary Mortgage Market Survey showed the rate for 30-year fixed-rate mortgages falling to an average of 3.66 percent, its lowest level since May 2013. The 15-year fixed-rate mortgage fell to 2.98 percent for the week ending Jan. 15. During the same time period last year, the 30-year FRM was at 4.41 percent, while the rate for the 15-year was 3.45 percent.

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