FHA VA Blog

The million dollar question after the rate cut today (Tuesday) was, "Ray, what will happen to mortgage rates?"

What you have to understand is that we are already at 50 year lows for mortgage rates. So to see rates continue to drop would equate to new lows in mortgage rates. Beyond our government saying they are going to buy mortgage backed securities, there are other entities that buy them as well. Pimco, the largest purchaser of bonds, is a big player. The chinese investors are a big purchaser of them as well.

First, I would read : One journalist's opinion about what this means. He actually figured out what us in the industry have always known. FED RATE CUTS DON'T EQUAL LOWER MORTGAGE RATES. Today, however, they also mentioned they were going to buy up more mortgage backed securities. That could lead to lower rates.

If I were refinancing (as I actually am), here is what I would look at. If you ask a lender about refinancing, ask them what the fees are for the market rate. But don't underestimate the power of asking them about the no cost option. I mean the true no cost option! This is where your lending AND title fees are absorbed by the lender. Let's take this deeper. If, you get the lowest rate (say 5%) on your $200,000 mortgage, your principal and interest will be $1,073~ However, add to that lending fees of 1% origination, processing, underwriting, credit report, doc prep and that totals $3,500 and don't forget title fees of about $1,300 as well. This totals $4,800 you will either add to your current loan or bring to the closing table.

OR: you take the true no closing cost option at say 5.5% with a principal and interest ($200K) at $1,135 (or $62 more per month). Now with that you actually have either a loan balance that is $4,800 lower or that much more in the bank after closing. Now only you can answer the question of is the lowest rate more important, or is the lowest cost loan more important?

Bear in mind, your tax bracket effects this equation, the time before you plan on selling or refinancing again also factors in the equation. So what I am getting at is the fact that the $62 savings is at a cost of $4,800. Which means you lent yourself $4,800 at a return of $62 per month. If you take simple math, it will take you 77 months to repay yourself $62 per month to make up that $4,800 you paid to get the lower rate. Will you have the house in 6.5 years, or the same loan? I didn't even factor in the mortgage interest portion (remember this is tax deductible, so lower rates equal less tax deduction).

Now, after my tangent. If you are thinking rates are going to get lower, know that in just my 6 years of monitoring the driving forces of rates, I have never been able to do no cost refinances at a lower rate then 5.5% for fixed rates. So, will they get lower? Don't get caught in the cold listening to the journalists (remember they are journalists!).

Ray~

This idea is similar to the November 26th announcement from the Federal Reserve where they indicated the intent to purchase up to $500 billion in mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae. In addition they would buy another $100 billion in direct debt issued by those firms. The November news caused bond prices to spike higher and forced mortgage rates lower. Just like any commodity, whenever tremendous buying interest exists, prices rise. Mortgage rates fell almost 1/2% in rate following the announcement. However, the following week market forces continued and rates spiked a bit higher from the recent lows.

It is important to remember that there are no details to the Treasury plan as of yet. The Federal Government does not directly dictate home loan rates. Rates are determined by price movements of Mortgage Backed Securities (MBS), which compete for investor funds in the open market. The Treasury can buy mortgage bonds on the open market but remember that they are not the only entity buying and selling these instruments.

The Treasury is in a very tough position in trying to manipulate home loan rates. Creating a new Federal mortgage program could be very risky. How would rates be set, who would qualify, and can the funds be used for purchases and refinances are just some of the questions being asked. The other critical concern is implementing such a program without destroying the current mortgage securities market. Doing so could have the unintended consequence of causing additional economic turmoil.

Rates are not going to 4.5% with the wave of a wand by Hank Paulson or Ben Bernanke. As a matter of fact, the massive borrowing to fund the TARP program has a negative effect on rates. At this time, the announcement still leaves a lot of uncertainty. What we do know is that rates are at historic lows and house prices have moderated setting up a great scenario for people who need to refinance or are looking to buy a home. Waiting for rates to fall to 4.5% may leave people sorely disappointed.

I am seeing signs of the market running right now on low 5% range rates for FHA mortgages. If you are buying a home give a call~

Ray

The latest news is that the treasury is going to buy up agency debt, and mortgage bonds responded positively. What we saw off of that news was an initial push positive, then a retraction.

Recently 30 year fixed rates have been in the ranges of 5.5%-6% at this current time. If you have a VA or FHA mortgage this means, you may be eligible for a streamline refinance. This refinance is a non-requalifying refinance. That means, no appraisal, no income or employment verification, no asset verification. Overall, none of the pain you may have felt when you took out your mortgage last time. You will also skip a payment and receive a refund on your current escrow account balance.

So should you refinance? You want to look at a combination of things to determine if you should. How long do you plan on living in the home? Do you plan on converting this home into a rental later? What is your current rate? How much lower can you get your rate and thus your payment? What will it cost (or add to your current loan amount)? How long have you had your current mortgage? Has the person you are talking with understand the impacts of a refinance and has analyzed the financial impact on your family?

If you are sitting at 6.5% on your current mortgage or higher, you may want to consider the refinance, if done right. Call or email for more details, and to go over the positive and negatives of refinancing your current mortgage. And make sure to ask what a true no cost refinance is, with whoever you are talking too. Ray

rwilliams@summit-mortgage.com