Archive for May, 2008

Trapped like a rat

May 30, 2008

Mortgage rates get their cue from the mortgage backed security bond market. When bond prices go up, mortgage rates go down. When bond prices fall, mortgage rates go up. There are several items that influence bond prices including economic reports, inflation, more investment into stocks, and “technicalities” of trading such as the 25 day, 100 day, and 200 day moving average

These “moving averages” act as either a key level of support or a level of resistance for bond prices. The 200 day moving average is one of the strongest levels. Since the mid 2007, the 200 day moving average has been a key level of support for bond prices that have kept mortgage rates at 6.250% or lower.

I mention this because mortgage bonds closed at the 200 day moving average on Wednesday, and closed well below the 200 day moving average on Thursday. What had been acting as a level of support is sadly becoming a level of resistance for bond prices.

This is important because bonds have only drifted below this level on three separate occasions within the past three years. The last time bond prices broke through the 200 day moving average, it took an onslaught of bad economic news to push it back above that line. How bad was the economic news? The poor economic reports that helped break through the 200 day moving average forced the Federal Reserve to begin cutting the Federal Funding rate back in September 2007.

There will be a noticeable impact on interest rates. The rates for a 30 year fixed mortgage have traded in a range of 5.625% to 6.000% over the past 11 weeks. With the price of bonds dropping below the 200 day moving average, expect the new trading range to begin at 6.125% or 6.250%.

The next couple of days are crucial. If bond prices can rebound quickly, they may be able to push through the 200 day moving average and make it – once again – a floor of support. As optimistic as that sounds, the trend direction for bond prices is down. Barring a timely reversal, bonds and mortgage rates are going to be trapped below the 200 day moving average, and we will see a shift in the market towards higher interest rates.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

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Conventional and FHA loans — Part 4

May 29, 2008

This series began by looking at the differences in Conventional loans versus FHA loans regarding interest rates, then mortgage insurance, and in the last post, how mortgage insurance is determined (appraisal value versus purchase price). Part four of the series will look into down payments and assistance for making down payments in both programs.

The purchase scenario is based on a $200,000 purchase price. The borrower will put a 3% down payment on the home. The rate for both loans will be 5.75%. Let’s begin with conventional loans.

If the borrower does not have at least a 3% down payment, the down payment can come in the form of a gift from a family member. For a $200,000 home, the down payment and/or gift amount would be $6,000. The loan amount would be $194,000.

FHA guidelines allow a borrower to use funds for a down payment by a gift from a relative, from a government grant, or a donation from a nonprofit organization. The borrower does not have to pay back the down payment, but there are differences between those options. Receiving a donation through a nonprofit organization can be a bit different. A typical scenario looks something like this:

— A borrower is interested in buying a home, but does not have the funds for the down payment

— The seller gives a donation in the amount of 4% of the purchase price to a nonprofit organization. To compensate the seller, the purchase price of the home is typically increased by 4%.

— The nonprofit organization will then give a donation in the amount of 3% of the purchase price to the borrower

— To be clear, this is not required, but is a typical scenario.

On a home with an asking price of $200,000, the agreed purchase price would actually be increased to $208,000. The seller then “donates” $8,000 to a nonprofit organization, and roughly $6,000 goes to the borrower for the down payment. That makes the loan amount $202,000, but wait, there’s more.

Don’t forget to factor in the 1.5% upfront MIP fee for mortgage insurance on an FHA loan (see the second part of this series for more information). The loan amount is now just a shade over $205,000.

An interesting question is now raised. How long will it take to get the FHA loan amount down to $194,000 – the original loan amount of the conventional loan under this scenario? Using a rate of 5.75%, it will take 46 payments (almost four years) to pay down the FHA loan balance to $194,000. For the life of the loan, this borrower would pay over $23,000 more for the FHA loan than the conventional loan.

Using a down payment assistance non-profit organization for the down payment, our borrower was able to get the $6,000 needed for the 3% down payment. However, at the end of the loan term, the borrower would have paid almost four times that amount through additional principle and interest! If it is possible to put at least 3% down yourself or get the needed funds through a gift from a relative, it would save you thousands of dollars to use a conventional loan instead of an FHA down payment assistance program loan.

As I said before, there are legitimate FHA down payment assistance programs out there. However, be careful which ones you choose to use because some of them are not what they claim to be!

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

More inflation troubles?!?

May 21, 2008

The minutes from the recent Federal Reserve meeting were released today and they continue to support the notion that our economy is slowing down. In fact, the minutes said there is an expectation for the economy to shrink over the first half of the year.

For an in depth review of the minutes, check out this article by Chris Isidore, a CNNMoney.com senior writer. To quickly summarize, the Feds posted negative revisions to their 2008 forecasts on economic growth, unemployment rates, and inflation. Specifically on inflation, the Feds said “it now expects personal consumption expenditures (PCE) to rise between 3.1% and 3.4% in 2008, a full percentage point more than its earlier expectation.”

What does that mean? The Fed’s target area for PCE (one of its favorite tools to measure inflation) is 2%. In April, that figure was at 2.1%. That means the Feds expect to see the PCE increase an entire percentage point by the end of 2008. I know what you may be thinking, “what is the big deal about 1%?” As an example, let’s use the cost of a gallon of milk with the time frame of 30 years.

This past weekend, I bought a gallon of milk for $4. Under the Feds preferred PCE target of 2%, in 30 years that same gallon of milk will cost $7 a gallon. At 3.4% (the high end forecast for inflation this year), the price of milk goes up to $11a gallon! This of course is inflation only and makes no assumptions on the cost of producing milk, food for cows, etc, but you can see why inflation is such a big priority for the Federal Reserve.

…for a sobering example of the increased cost on big ticket items, see this previous post using the MSRP price on a Toyota Corolla…

Inflation will also have a negative impact on mortgage rates. As inflation figures continue to climb, you can also expect to see an increase in rates. Now the increase could be tempered with bad economic reports/forecasts, but expect inflation to cause an increase to rates as we continue to move through 2008.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Conventional and FHA loans — Part 3

May 5, 2008

In part 3 of our series, we will look closer at the subtle differences in mortgage insurance for conventional and FHA loans (remembering on an FHA loan it is called MIP = Mortgage Insurance Premium). First, let’s quickly recap some of the difference between private mortgage insurance (conventional) and mortgage insurance premium (FHA).

— There are ways to avoid mortgage insurance with a conventional loan. That is not the case on an FHA loan.

— There is an upfront fee of 1.5% of the loan amount for MIP on an FHA loan.

— The monthly premium for MIP (FHA) is less than the premium for PMI (Conventional)

— MIP is based on the purchase price of the home and not the appraisal value of the home.

So what is the difference basing mortgage insurance (MIP or PMI) on the purchase price versus the appraisal value of a home? The difference involves when you can remove the mortgage insurance payment from your mortgage. Let’s look at an example based on the following:

— the purchase price and appraisal value are both $200,000

— 78% loan to value will be used as the threshold needed to be met in order to remove mortgage insurance

— both loans will be 100% financing with an interest rate of 6.000%

If you purchase a $200,000 home with an FHA loan, MIP is based on the purchase price. In order to remove MIP, the loan must be paid down to $156,000, or 78% of the home’s purchase price. Making regular monthly payments, it will take 12.5 years to pay down the loan to 78% of the purchase price in order to remove MIP.

If you purchase a $200,000 home with a conventional loan, PMI is based on the appraisal value. You make your regular monthly payments, but let’s say over the course of 5 years, your home averaged an appreciation of 1.5% per year. After 5 years, your house is now worth almost $215,500. Instead of needing to pay down the loan amount to $156,000 to remove PMI, your new target is $168,090. If your home continued its 1.5% appreciation each year (and you continued to make your regular monthly payments), you would reach the 78% mark at year 8 – roughly 4 years earlier than on an FHA loan.

In summary, if you qualify for a conventional loan, odds are it would be better in the long run to get a conventional loan in order to avoid paying the 1.5% upfront MIP fee with FHA loans along with being able to remove mortgage insurance sooner with a conventional loan.

Borrowers who don’t qualify for a conventional or are in need of down payment assistance should take a closer look at FHA loans, but be careful! Some down payment assistance programs are not what they seem, and that will be part 4 in our series.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.