What was hoped to have happened in October was finally announced Tuesday.  The Federal Reserve plans to buy up $100 billion in direct debt from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.  They are also going to buy up to $500 billion of mortgage backed securities.  The Fed said that “the $600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.” 

So what does this mean for the mortgage market?  Well, firstly, Fannie Mae and Freddie Mac will be able to unload some underperforming loans thereby freeing up more money to lend.  Mortgage rates for conforming loans dropped dramatically on this news, almost 0.5%, down to about 5.50% with no points for a good quality borrower.  By the way, that is for a 30 year fixed!  Better yet, 30 year fixed rates of 5.0% are now attainable…and only for a 2 point cost.  Last week at this time, more like a 5 point cost.

What does this news mean from a buyer’s standpoint?  The payment for a loan of $400,000 at 6% equals $2,398 per month.  Buy down the rate today to 5.0% and that same loan only costs $2,147 per month.  Or, keep the same payment of $2,398 and be able to afford $446,700 at 5.0%.  Remember the 2009 San Diego County conforming loan limit of $546,250?  The payment at 5.0% is only $2,932 per month!

This rate drop dramatically increases purchasing power, but it also opens many doors for those looking to refinance.  I have spoken with several clients over the last few months who were hesitant to give up their 5.75% to 6.25% adjustable rate mortgages, many of which are interest only loans.  The new, lower rates now allow these folks to switch to 30 year fixed loans with only minimal payment increases…the difference will now be going to principal.

Are you pre-approved, but for an amount that is too low for where you want to live?  If so,  contact your lender (or me for that matter) to see how much more you can afford.  An extra $20,000 or $30,000 in sales price can go a long way in some neighborhoods and this goes for FHA and VA buyers as well, since those rates dropped too.  If your lender went out of business or just simply cannot be reached, please feel free to call me at 760-500-1919 for more information.