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Mortgages & Refinancing

Outlook for Mortgages in 2016

Find out where mortgage rates are headed.

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Mortgage credit is still tighter today than it was during the lead-up to the housing bust, but it has loosened a little every year since 2009. Whether you're buying or refinancing, it's easier to get a mortgage at rates that are still at historically low levels. The average 30-year fixed rate hovered around 4% in the past year, dipping to 3.76% at the end of October. That makes six years in a row that the 30-year fixed rate has been below 5%, and the pattern won’t change in 2016. Kiplinger expects the 30-year fixed rate to end the year at 4.4%.

See Also: Housing Outlook, 2016

The interest-rate premium for conforming jumbos (loans of $417,000 to $625,500) that lenders added during the financial crisis has mostly disappeared. Jumbos (loans of more than $625,500), which lenders typically hold on their own books, occupy a sweet spot, says Guy Cecala, publisher of Inside Mortgage Finance. This past fall, lenders offered jumbo rates as low as 3.6%. They consider jumbos to be relatively low risk because borrowers typically have a high credit score and a large down payment.

Borrowers who want to buy or refinance will find fixed-rate and adjustable-rate loans backed by Fannie Mae and Freddie Mac that require just 5% down. Freddie Mac offers a 3%-down-payment program to home buyers with low to moderate incomes, which can provide a less costly alternative to loans insured by the Federal Housing Administration that require 3.5% down but impose up-front mortgage insurance costs.

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Still time to refinance? Of loans made in September, 42% were refis. "Nobody expected a mini refi boom in 2015, but that's what happened," says Cecala. Because a small rate change can make a big difference in the payment on a jumbo mortgage, many jumbo borrowers have refinanced within a year of a previous refi, he says. With little or no increase in rates, refinancing could still be attractive through the first half of 2016.

Lenders have been reluctant to roll back the higher standards for credit score and loan-to-value and debt-to-income ratios that they imposed over those required by Fannie Mae and Freddie Mac, says Cecala. Most lenders will compete for your business with greater flexibility in underwriting rather than with a lower rate. They will allow, say, a higher credit score to offset a higher debt-to-income ratio, or a larger down payment to offset a lower credit score.

Although the documentation required to obtain a conforming mortgage is pretty straightforward, prepare to feel raked over the coals if you have been jobless recently, you're self-employed, you have commission-based income or you're changing jobs during the application period. One bright spot: In early October, lenders introduced new closing procedures to make disclosures clearer and reduce paperwork.

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