For the week of Sep 13, 2010 --- Vol. 8, Issue 37

View: Wondering how much house you can afford? Read on for a simple formula that can help.

"ACTIONS SPEAK LOUDER THAN WORDS." Despite the markets being closed last Monday for Labor Day, there was plenty of market action... and plenty of words from the Fed. So what happened, and what was said? Read on for details.

After the recent 4-month rally in the Bond markets, which has led to some of the best home loan rates in history, money has started shifting over to the Stock market. Why has this happened? Some economic reports have been better than expected in the past few weeks... such as the Jobs Report for August and Consumer Confidence. While that’s great news, it’s important to remember that good economic news - or as has happened recently, better than expected news - often causes investors to move their money out of the safe haven of Bonds to Stocks in the hopes of taking advantage of any gains.

So why does this behavior impact home loan rates? When the economy appears strong or starts to improve, and investors move their money from the safe haven of Bonds to Stocks, a decreased demand for Bonds means that Bond prices move lower. And when Bond prices move lower, it means that Bond yields - and consequently home loan rates - move higher.

In fact, given the recent better than expected economic news, St. Louis Federal Reserve Bank President James Bullard last week shifted away from previous comments he had made about deflation and said that while he sees a slowdown in the economy for the second half of this year, he predicts a pick up in 2011. He also said that the Unemployment Rate will likely fall next year, and business spending should start to rebound.

While continued improvements to our economy are good news, one big impact is that home loan rates will start to increase. And when home loan rates start to increase, they tend to increase quickly. That being said, while home loan rates ended the week about .125-.25 percent worse than where they began, they are still near some of the best levels we have ever seen!

If you or anyone you know would like to learn more about taking advantage of historically low home loan rates while they remain so, please don’t hesitate to call or email me as soon as possible. Or forward this newsletter on to anyone you think may benefit and I’d be happy to talk to them free of charge.

WHEN YOU’RE BUYING A HOUSE, THE LAST THING YOU WANT IS TO BUY MORE HOUSE THAN YOU CAN REALLY AFFORD. CHECK OUT THE MORTGAGE MARKET GUIDE VIEW FOR A SIMPLE FORMULA THAT CAN HELP.

Simple Formulas for Affordability and Saving

When people decide to buy a home, the monthly payment is a crucial factor. Conservative underwriting state that borrowers should allocate no more than approximately 30% of their gross monthly income for a house payment. Looked at from another perspective, this means if your monthly income is $4,000, you should keep your house payment under $1,200 a month.

How much home can you afford?

Affordability is a function of home price, interest rate and down payment.

The one key component in home affordability that is at greatest risk today is rates. The fact is that home loan rates are still at historically low levels. But they can’t stay this low forever. In fact, many experts have stated that home loan rates should really be higher than their current levels, due to some of the stimulus that has benefitted Mortgage Bonds. That means that right now homebuyers can get more for their money than they realize, but if rates go up even a little bit they could miss out.

Here’s a simple formula that drives that point home...

In simple terms, every 1% increase in home loan rates decreases the buying power of an individual by 10% in home price. This means that if you qualify for a home priced at $200,000 today and home loan rates increase 1%, the amount you could qualify for would be reduced to approximately $180,000 to maintain the same payment.

If you could benefit from moving to a new home, don't let this time pass you by. Home prices are starting to stabilize and even increase in many markets, but homes are still at incredibly affordable levels. By making a move now before home prices or rates increase, homebuyers can get more for their money and still get the payment they’re comfortable with.

And for those people who haven't refinanced in the last 18 months, today’s situation provides you with the opportunity to either cut your house payment... or save even more over the long run, by reducing the term of your mortgage to a 15 or 20 year fixed rate.

As always, I’d be happy to answer any questions and help calculate any scenarios that would help with your decision-making. Just call or email me today.

 The material contained in this newsletter is provided by a third party to real estate, financial services and other professionals only for their use and the use of their clients. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is not without errors.

 Helen Ruehmer
7000 Houston Road 100-5
Florence KY 41042

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