First Time Home Buyer

It is the opinion of many people that the government, despite what the President may say, will in fact bail out mortgage high players Fannie Mae and Freddie Mac. For these companies to fold would be detrimental to the economy. But what exactly are Fannie Mae and Freddie Mac and what do they do? Simply put, a home buyer achieves a mortgage from a lending institute and Fannie Mae or Freddie Mac purchase the mortgage to then resell it again to investors. They receive money from the sale to the first lender to continue lending. In the last decade Freddie Mac handled nearly $164 billion in New York mortgages alone; serving over 1,325,000 families. If Freddie Mac and Fannie Mae have serious financial problems then credit will tighten and it will become increasingly difficult for any consumer to get a mortgage; but particularly for the first time home buyer. At this point it is unknown how much money these companies will need to borrow from the Federal Reserve, the government or the public treasury; however, the government has stated that if they do need it they can come for it. With the potential for government bailouts confidence is building.

When push comes to shove, impact from national news or news on a local level does not change the rules in applying for a first mortgage; make sure you have your finances in order before shopping for a home, make sure your credit is in line and be aware of your credit score. The first time home buyer needs to educate themselves more than ever as lenders begin to tighten their belts. Knowing what your credit score is, how to increase that score and look favorable to the lenders will increase your chances of obtaining a mortgage regardless of what is happening in the financial world; these are basic rules.

Before a lender will grant a loan for a home he will first run a credit report on the buyer to help them get a picture of the buyer’s ability to pay the loan. The last thing a lending institute wants is for a buyer to get in over their head and default on their mortgage. It is therefore recommended that before shopping for a home or showing up at the lending institute to apply for a first mortgage you run a credit report of your own. You can do this for free once per year by going to annualcreditreport.com. This will help you figure out any areas that need to be corrected and what areas could be improved. Once you are satisfied and your lender runs the report he will be able to help you understand what you can afford. If you have discovered your credit is in shambles or your credit score is low there are ways to bring up your credit score and you will have the time to do so.

Freddie Mac and Fannie Mae having financial problems is just the reflection of what is happening in the economy today; we are all feeling the pinch. This is a time, more than any to tighten our own belts, avoid using credit excessively and manage your credit well; doing these things will allow you to be among the few people that the lenders extend a first time home buyers loan to.

Mortgage rates have trended slighly higher throughout 2008 even as the Federal Reserve was aggressively cutting its key federal funds rate from 5.25% last summer to 2% recently. Most experts offering mortgage rates predictions agree that further increases are likely. However, put 10 economists in a room together and ask them how high interest rates will rise and you’ll likely get 20 different predictions.

Today’s mortgage rates for a 30-year fixed currently stand at a national average of 6.5%. That’s roughly where they were in September 2007. While 6.5% seems high, that is still lower than mortgage rates ever were throughtout the decade of the 1990s.

The question becomes, “How high will mortgage rates rise?”

Answer: Nobody knows for sure.

The Federal Reserve has been actively “managing” inflation expectations for the last 6 years. And they’ve been extremely succesful up until now. During that period, the cost of a barrel of oil has gone from $20 per barrel to $143 per barrel. And the entire time public and investors have believed the notion that the surge in price has been temporary. Everyone expected prices to come back down. Nobody (except this author and a few other nutjobs!) expected oil prices to remain high and climb even higher.

How high can they go? As long as central banks throughout the world are able to create money without restraint, the sky’s the limit.

For the first time since the subprime mortgage crisis began last summer, the Federal Reserve left their key interest rate unchanged at a low 2%. Unclear whether a slowing economy or growing inflation was a greater threat to the financial well-being of the nation, policymakers decided to wait for the effects of 10 months of lowering interest rates to be felt. They also issued a statement saying they’d be on guard against both economic decline and an inflationary price surge.

While today’s mortgage rates will not be affected, in the coming months if Fed Chairman Ben S. Bernanke and his colleagues are forced to tackle inflation, they may have to crank up rates much higher than they would if the problems were entirely domestic. Rising food and energy costs are not just limited to the United States. Those price increases are being felt across the globe.

However, rising inflation expectations are a special worry for central bankers because they signal that people have begun to assume that prices are on the way up and therefore that they should charge more for their labor or products. That is a recipe for setting off a vicious cycle of higher prices feeding still higher ones. Once inflationary expectations set in, it is a difficult process to stop.

The Federal Reserve routinely speaks of managing inflationary expectations. If the public believes that higher prices are here to stay, people will begin charging more for their labor or products. Thus the Fed tends to lean towards issuing statements that are slanted towards not only moderating inflation, but also that high prices will be coming back down.

Real world events of the past few years are completely opposite of the Fed’s forecast for moderating inflation. The price of oil has risen nearly seven fold from a low of about $20 per barrel in 2002, to a high near $140 per barrel today.

Federal Reserve policymakers are hoping that as long as the public believes the Fed will act to control inflation, today’s price increases are unlikely to feed tomorrow’s wage claims, and a wage-price spiral can be averted.

However, prices have risen significantly, even if inflation expectations haven’t. The problem is that consumers need higher wages just to match the price rises of the past few years. Until consumers’ income can catch up with rising prices, economic recovery will be elusive.

But for now, first time home buyers can enjoy low rates. Our mortgage rates predictions are for rising interest rates because of rising inflation - a forecast that is directly at odds with the most powerful central bank on Earth.

Which forecast will prove to be more accurate? Only time will tell.