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photo credit: TW Collins

Once you feel comfortable that you have a mortgage professional who can advise you, here are some secrets for shopping effectively.

First, just like anything else IF IT SEEMS TOO GOOD TO BE TRUE, IT PROBABLY IS. No one has a commodity on rates- interest rates all come from the same places, and if the rate sounds really unbelievable, ask a few more questions. Is there a prepayment penalty? Are there extra fees? What is the length of the lock-in agreement? If fees are discounted, is it built into a higher interest rate?

Second, YOU GET WHAT YOU PAY FOR. If you are looking for the cheapest deal out there, understand the risks, especially with the recent credit crunch you need a TRUE PROFESSIONAL on your side someone who is checking guidelines and is up to speed on the market changes. We have all heard the horror stories from friends and family about missed closing dates, or surprise changes at the last minute on interest rate or fees…usually due to working with discount or internet lenders who may have a serious lack of experience. Remember, the cheapest rate on the wrong strategy can cost you thousands more in the long run.

Third, MAKE CORRECT COMPARISONS. When looking at estimates, there is more to it than just the bottom line. You must compare apples to apples the Lender fees are the only costs that the Lender controls all other fees are third party costs. You may be familiar with the term “junk fees”. All Lenders have a fee to process your loan- simply the cost of doing business. Many Lenders have both a processing fee and a funding fee, typically these fees together do not exceed $1,200. If you see a number of other Lender fees listed I would ask your Mortgage Professional for more information.

A Lender is responsible for quoting the other fees associated with a mortgage loan such as title insurance, hazard insurance, appraisal, days of interest., ect.. Keep in mind since they are third party costs – they are often under-quoted up front by a lender to make their bottom line appear lower. Keep your eyes out for these discrepancies and be sure to ask questions about fees you do not understand.

Lately we have seen hidden discounts fees that are NOT included in the bottom line estimate. This hidden fee will appear in small print typed at the bottom of a good faith estimated “X” discount point to be charged ect… again- if it seems to good to be true it likely is.

Fourth, UNDERSTAND THAT INTEREST RATES AND CLOSING COSTS GO HAND IN HAND. A good way to view loans is either Cost, No Cost or Shared Cost– if you are looking for a no cost loan understand that this comes at the expense of a higher interest rate- there is no free lunch. It all depends on what your goals are.

For instance:

How long will you be in the property?

Are you close to retirement?

Is this your primary residence, 2^nd home or an investment property?

What’s more important to you right now cash on hand or a lower monthly payment?

Do you have any life changing events coming up a baby or kids leaving for college?

Is the seller paying any of your closing costs?

A professional advisor will be able to offer the best advice in terms of the balance between interest rate and closing costs that correctly fits your personal and financial goals.

Sample Analysis:

$250,000 Loan with 1% Origination Fee = $2,500 at 5.875% = $1,478.84 principal & interest payment

$250,000 Loan with 0% Origination Fee = $0 at 6.125% = $1,519.03 principal & interest payment

Difference of $40.19 per month divided by $2,500 = 62.20 months or 5.18 years to recoup my costs

Fifth, UNDERSTAND THAT INTEREST RATES CAN CHANGE DAILY, EVEN HOURLY. This means that if you are comparing Lender’s rates and fees – this is a moving target on an hourly basis. In order to have an accurate comparison – you must get these quotes within less than an hour of each other. Be sure the terms are the same- product and program. You also must know the length of the lock you are looking for, since longer rate locks typically have slightly higher rates.

As this is likely one of the largest financial purchases you will make- be smart, ask questions, and seek the advise of a professional advisor not just some one who will quote you the lowest rate out there.

photo credit: sosico

First and foremost in order to shop effectively you need to make sure you are working with a professional, someone who is interested in your goals and plans for the future. This is very likely your largest asset as well as your largest debt.

Ultimately what we are talking about here is a lien against your income – and what is the best way to manage that? You are looking for someone who can advise you not just quote rates and payments over the phone. Get a recommendation from your Realtor they often have professionals they like working with and have completed multiple transactions with in the past. Or it is always nice to have a warm introduction from friends or family especially when you are dealing with your personal financial well being.

Here are four simple things your Mortgage Lender MUST KNOW the answers to otherwise you need to seek another opinion.

What are mortgage interest rates based on?

Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. Often times the 10-year Treasury Note trends in the same direction as Mortgage Bonds, other times it moves in the completely opposite direction.

What is the next Economic Report or event that could cause interest rates to move?

A professional lender will have this at their fingertips.

Do you have access to live, real time, mortgage bond quotes? Mortgage Bonds and interest rates are moving in real time several times a day and you need to make sure you are talking with someone who will warn you in advance of a costly intra-day price change, Would you work with a stockbroker who is only able to grab yesterday’s paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future? Of course not.

When The Fed “changes rates”, what does this mean… and what impact does this have on mortgage interest rates? The answer may surprise you.  When the Fed makes a move, they can change a rate called the “Federal Funds Rate”.  This is a very short- term rate that impacts things like- credit cards, Home Equity Lines of Credit, auto loans, etc… On the day of the Fed announcement, Mortgage rates most of the time will actually move in the opposite direction as the Fed change. Typically this is due to the dynamics within the financial markets in response to inflation.

FYI: PRIME is made up of the The Federal Funds Rate plus a margin of 3%. Today PRIME is at 5.00% = federal funds rate of 2.00% + a margin of 3.00% = 5.00%

I hope this helps you understand a little more about how interest rates work. Keep in mind rates are currently at 40 year lows now is an excellent time to learn more about purchasing. My next blog entry will highlight some more secrets for shopping effectively…

Look forward to your comments.

Rates have faired well this week amidst a fairly stable performance by the stock market. Mortgage Backed Securities have been trading inversely to the stock market’s performance.

Currently the rates are as follows:

Conventional 30 year fixed, 5.625%

FHA 30 year fixed, 5.50%

5/1 Interest only ARM, 5.50%

Jumbo 30 year fixed, 7.75%

Contact us for current rate information or to be connected with a Trusted Mortgage Professional!

The Mortgage Bankers Association (MBA) reported today, that total mortgage applications spiked 48% last week following the Federal Reserve’s move to cut short term interest.

The index that tracks refinance application actually went up 82.2%, while purchase loans were up 10.6%

What I’d like to know is what percent are FHA loans.  The reason for this is the FHA loans are going to be able to help out those behind on their current mortgage payments.  While conventional loans aren’t going to be able to help those currently in trouble.

One of two things are happening, either many people (more…)

What?  The Fed lowered the Fed Funds rate today .75% and mortgage rates went up?  Yep, that’s right.  That doesn’t make sense.  I thought if the Fed lowered rates, mortgage rates would follow?  Nope that’s not how it works.    

 ”Mortgage rates frustrates buyers” was a timely article in the Denver Post this past weekend and it’s a must read for every current and prospective homeowner.   The point of the article, the Fed does not determine the direction of mortgage interest rates.   Plain and simple.  http://www.denverpost.com/business/ci_8580045

So, when the Fed lowers or increases rates, what exactly are they doing?  They are increasing or lowering the Fed Funds Rate - not mortgage rates.  They lower the Fed Funds rate to stimulate the economy and raise the Fed Funds to slow things down.  The Fed’s #1 job is to prevent inflation, but in general they are responsible for keeping the economy humming somewhere between recession and inflation - not an easy task.  Why? the Fed “cuts” or “increases” typically take 6-9 months to trickle through the economy and it’s not an exact science.  

What you need to know is that mortgage interest rates are determined by the price of Mortgage Backed Securites.  These financial instruments are traded daily and as their prices increase, interest rates come down and vice versa.  These mortgage backed securites are very sensitive to economic data, especially the actions of the Fed.  The MBS trade throughout the day, like stocks, which is the reason mortgage interest rates can change without notice.  A 30 yr fixed loan can be 6% in the morning and 6.5% by time you get back from lunch.  I’m not kidding.  It happened several time this past month.  The markets get wind of an inflationary report or rumor and BOOM, the selling begins and rates jump up!  It’s not a lot of fun explaining that to a client when they didn’t take your advice to lock in the morning.  There’s a lot of volatility in the MBS market.

Mortgage rates have actually increased the last six times, including today, that the Fed has cut the Fed Funds rate.  Why?  Inflation is the number one enemy of mortgage backed securites as it erodes the value of these instruments.  Traders are always fearful that the Fed will over stimulate the economy by lowering rates too much, thus causing inflation 6-9 months down the road.  In order to protect their investment they like to “sell” their MBS after a Fed rate cut, flooding the bond market with mortgage backed securities, prices drop like a rock and interest rates spike up.  It can happen in minutes.  In fact, as I write this, MBS have lost 90 basis points.  Yesterday they were up 150 basis points.  Yesterday was the day to lock.  I had a few clients that listened to me. 

What can you do?  First, read the attached article several times so you really get it!  Second, stop listening to your parents, friends, co-workers, neighbors and all the other experts in your life giving free financial advice about the direction of interest rates.  Don’t worry, you are not alone, I have plenty of those experts in my life too.   Third, stop gambling with your money and thinking that mortgage rates might drop if the Fed lowers the Fed Funds rates.  You have better odds going to Vegas.   

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