The U.S. Department of Labor released its monthly jobs report this morning and it showed the U.S. added 215,000 new jobs in July. This was slightly ahead of the 212,000 number that economists were expecting. The trade and transportation sector posted the largest gain with 60,000 jobs added, followed by professional/business services at 40,000, retail at 36,000, leisure/hospitality at 30,000, health care at 28,000, manufacturing at 15,000, construction at 6,000, and government at 5,000. This is a stark contrast from the past where the government detracted from the jobs number. The unemployment rate remained unchanged at 5.3%. May and June’s numbers were revised up by a total of 14,000. This puts the average job gains over the last three months at 235,000, up from the 195,000 pace in the first quarter of 2015.
While the numbers aren’t spectacular, they are “good enough” to keep the Federal Reserve’s rate hike in September a good possibility. The Federal Reserve has said their hike will be data dependent, and this month’s numbers appear to keep everything on track for September. At 5.3%, the unemployment rate is right where they predicted it would be at the end of 2015 and there is no sign of inflation pressure. St. Louis Federal Reserve President James Bullard and Dallas Fed President Dennis Lockhard both said the Fed is on track to raise rates in September. We see no data that seems to point to anything other than a September hike at this point.
Housing Data Picking Up
As noted above, the construction sector added 6,000 new jobs in July. Interestingly, the sector is reporting a lack of skilled labor available and demand for these workers is outpacing supply, pointing to construction picking up, especially in new home construction. On July 17th, the Department of Housing and Urban Development released their monthly housing start numbers, which came in ahead of expectations. The next data on this metric will be very telling on the direction of the economy, as we have seen a bit of volatility in the numbers over the last few months. A strong number could propel the economy (and stock market) ahead. The numbers are set to be released on Tuesday, August 18th. We will be watching this closely and will include the data in that week’s email.
Choosing the Right Mortgage
Before you choose a house, you need to choose a mortgage. Lenders offer several different options for mortgage loans, so you should be able to find one tailored to your needs. To determine which type of mortgage is best for you, first learn the basics.
With a fixed-rate mortgage, you lock in to an interest rate, which you pay for the duration of the loan (unless you refinance). Each of your monthly payments is the same, and each includes money toward both principle and interest. The payments follow an amortization schedule that typically pays more interest at the beginning of the payment period, and more principle as time goes on. You can choose between several mortgage durations, including 10, 15, 20, 30 and even 40 years.
Thirty-year fixed-rate mortgages are the most common because of the low monthly payment they afford. The longer your loan duration, the longer it’ll take to build equity and the more you’ll eventually pay in interest; however, your monthly payments will be lower, allowing you to afford a more expensive house.
• Your monthly payments will always be the same, which makes it easier to budget. You won’t have unexpected and unbudgeted house payments, and your rate won’t go up with inflation.
• Fixed-rate mortgages are risk-averse and secure, providing borrowers with peace of mind.
• If interest rates are low, you can lock in a favorable rate and keep it even when rates inevitably increase.
• If interest rates drop after you take out a fixed-rate loan, you won’t be able to benefit from the lower rate unless you refinance, which could cost money.
• While your principle and interest payments will stay the same each month, your insurance and property taxes are liable to fluctuate, making your monthly payments inconsistent anyway.
Adjustable-rate Mortgages (ARM)
In contrast to a fixed-rate mortgage, the interest rate in an adjustable-rate mortgage (ARM) fluctuates. All adjustable-rate mortgages start out with a low “teaser” rate, and after a predetermined period, the rate changes. It can then continue to change at regular intervals. You can find numerous styles of adjustable-rate mortgages—they vary in terms of how long the teaser rate lasts, how often the interest rate changes and what index determines the interest rate fluctuations. For example:
• A 3/1 ARM will stay the same for the first three years. After that, the interest rate can change yearly.
• A 5/2 ARM would stay the same for five years, and then change every two years.
Each ARM also has an adjustment cap, which limits how much the interest rate can increase or decrease.
• If you know you’ll only live in your home for a few years, and that time period falls within the introductory interest rate period, you won’t have to worry about future interest rate increases.
• You’ll save money during the introductory period, because interest rates at the beginning of an ARM are lower than you’d get with a fixed-rate mortgage.
• With lower monthly payments up front, you can put your extra money in higher-yielding investments for the duration.
• If rates increase sharply, your payments will increase as well. You may not be prepared for drastic changes in your monthly bills.
• Even if interest rates go down, your monthly payments may not decrease very much.
• There may be penalties for paying off your loan early.
Interest-only mortgages are often a variation of an adjustable-rate mortgage, allowing you to pay only interest for a period of time before you owe money toward the principle, either at an accelerated rate or as a balloon payment. With a fixed-rate mortgage, you pay down both interest and the principle from your first payment, and gradually shift toward principle payments throughout the loan’s term; with an interest-only mortgage, however, you start with only paying down interest, and the shift to paying principle is abrupt.
• The payments you make during the interest-only period will be much lower than they would be with a different mortgage payment plan, allowing you to buy a house sooner.
• If you know you’ll be making more money in the near future—if you’re finishing a degree or just starting out in a professional field—your payments will grow along with your salary, so your mortgage will fit within your budget.
• With lower initial payments, you can invest more money elsewhere during the initial period.
• Payment shock is a possibility with interest-only mortgages as well as ARMs. If you aren’t certain you’ll be able to make the increased payments, don’t choose this type of loan.
• With an interest-only mortgage, you risk negative amortization, where you owe more on your mortgage than you initially borrowed.
• If your house’s value decreases enough to be worth less than the amount you owe, refinancing may not be an option.
• You won’t build any equity during the interest-only period.
Choosing between these mortgage types will involve comparing interest rates, assessing your current and future income and understanding your tolerance to risk. You’ll also need to consider how the housing market is doing and how you think it will behave in the time you plan to live in your house. The most important thing is to understand the terms of whichever mortgage you end up choosing. Make sure to ask questions when comparing the various mortgage types, and understand the loan you choose so you can make informed payment decisions.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.