Mortgages


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Currently, most people are concerned about where prices are headed and whether or not prices have bottomed. However, one thing to consider as you are thinking about your first (or next) home purchase is the mortgage rate as most forecasts call for a half percentage point increase or more by year’s end.

Which is better? A lower price or a higher rate?

The California statewide median price was $291,760 in May 2011. At the same time, the average mortgage rate on a FRM was 4.64 percent (according to Freddie Mac’s weekly survey of mortgage rates), corresponding to a monthly principal, interest, taxes, and insurance (PITI) payment of $1,538 (assuming a 20 percent down payment and a 30 year term). If the price declines by 3 percent, the monthly PITI would drop to $1,492 saving $46 on the monthly payment. What if the price drops by 3 percent, but mortgage rates rise by ½ of one percent to 5.14 percent? The monthly payment would rise to $1,560, which is $68 more than the PITI for the lower priced home, thus wiping out any gains made from the price decline.

The Price/Rate Trade-Off: Bottom in Prices or Rock-Bottom Rates?

In the long-run, current mortgage rates can save you money.

The bottom line is that minor price fluctuations have only a minor impact on the monthly payment, while even small changes in mortgage rates can make a big difference when calculating the monthly payment.

In the long-run low mortgage rates should be a major deciding factor as rates are very likely to edge up over the next six months. When you have rock bottom rates, they really have nowhere to go but up. Waiting on the sideline could mean the difference between qualifying and not qualifying to buy a home.

The Price/Rate Trade-Off: Over Time, Waiting Could Cost You

I thought I would share this news update with you all on some changes that will affect the loan limits, mortgage insurance premiums, and interest rates. You will see that these changes may have have an impact on you, whether you are buying a home or refinancing.

President Obama has signed into law H.R. 3081, which among other items is the authorization to extend current $729,750 temporary high-balance conforming loan limits provided through Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). This ensures that current loan limits for single-family residential mortgages will remain in place until September 30, 2011. The move to extend the higher limit will effectively keep interest rates super-low for a large swath of home buyers and borrowers with loan amounts between $625,500 and $729,750. The bill also appropriates $20 billion so that FHA can continue making loan commitments through the end of 2010.

Additionally, beginning today there will be changes in the way borrowers pay for the privilege of using low-down-payment, government-insured mortgages to buy or refinance a house. FHA will lower its upfront mortgage insurance premium from 2.25% to 1% (except for HECMs) while simultaneously increasing the annual premium from 0.55% to 0.9%, which is collected on a monthly basis. Because most borrowers choose to finance the initial fee as part of the loan amount, the net result for most people will be lower monthly payments for the first few years their loans are on the books. This change will affect purchase money and refinance transactions, including FHA-to-FHA credit-qualifying and non-credit-qualifying streamlined refinance loans.

Mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note. Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield. Rates on adjustable-rate mortgages are tied to yields on two-, three- and five-year Treasuries. These short-term loans are more sensitive to Fed rate movements, and those with the shortest maturities see the greatest impact when short-term rates rise and fall.

So if you want to know the direction of mortgage rates, you need to get a sense of where bond yields are heading. Investors tend to flock to the safety of U.S. Treasury when they’re worried about the state of the economy. That “flight to quality” drives bond prices higher and their yields lower. (Bond prices move inversely to yields.)

Rather than gamble and wait on lower rates, consider a lender that is willing to let your rate “float down” if mortgage rates drop after you’ve locked in your loan, but before the closing. Lenders often charge fees for float downs–typically around 0.25% of the loan balance–so make sure you understand the loan’s terms of the float down before you choose the option. Feel free to ask me for a Mortgage Broker referral.

Spring time is upon us and that means the beginning of the real estate selling and buying season. Homebuyers are out in big numbers looking for homes and sellers are preparing their homes to sell. If you will be looking for a mortgage lender this spring here are a few tips:

IT’S A NEW MARKET: How the subprime woes affect you?

A number of subprime mortgage lenders are in trouble. Stock markets have been struggling because of worries about lenders who underwrite mortgages for people with less-than-enviable credit. Some two dozen companies have been affected. The crisis is also hitting better known banks and Wall Street brokerages that invested in these loans. The impacts are being felt from Tokyo to London.

A recent study predicted that one is five subprime mortgages issued in 2005-2006 will fail.

In addition, to hedge their risk and compensate for their losses, lending standards have tightened. That means if you have less-than-enviable credit, it’s going to be harder to qualify for a mortgage. You may be paying higher rates on your loan because lenders are commanding higher returns to compensate for their losses.

Do your homework. Since lending standards are likely to be more strict, you should have a very good sense of what your credit history is like before you start calling up mortgage lenders. Some lenders may consider a FICO score below 620 to be more risky, but today, even if you have a slightly better score, you may be considered a risk.

Comparison shop. Don’t wait until the last minute to search for mortgage options. You’ll want to get offers from at least three lenders so you can compare the terms of your mortgage.

Look for ways to negotiate price. Have your real estate agent come up with a price per square foot by evaluating houses that are on the market now in the area you are looking at. Those houses should be similar to the one you’re looking to buy in size, number of bedrooms, and other major features. This gives you a rule of thumb you can use to compare homes you’re considering and know what price you should be looking for.