Posts Tagged ‘interest rates’

Rates holding at historic lows

June 8, 2010

Interest rates are high, aren’t they? The experts predicted higher rates by mid year, and I even mentioned that would happen here, here, here, here, here, and here (if not more). If you read those posts, you will see there were several reasons why I (and essentially everyone else) thought this would happen. These reasons primarily revolved around the Federal Reserve ending their buying mortgage backed security (MBS) bonds.

* – definitely read the first linked post to get some more background information on that program from the Federal Reserve

SO… why are interest rates at their lowest point of 2010? Why did rates not dramatically rise when the Federal Reserve ended their program of buying  bonds?

Thanks to the debacle in Europe (along with our own economy that isn’t back on its feet), investors in the US and around the world are back to buying our debt (bonds) and not those of Europe. It was the heavy investing in Europe and the Euro that caused the precipitous drop in the value of the Dollar, which motivated the Federal Reserve to begin buying MBS bonds in late 2008 and increase their value.

Why is this important? – As the value of MBS bonds rise, interest rates fall. This cause and effect pattern, heavily influenced by the Federal Reserve over the past 18 months, led us to these historically low interest rates. When the program ended this past March, everyone assumed rates would rise. Well, they obviously didn’t and there were plenty of other investors more than willing to step in and buy bonds to keep rates low!

Now for the question we would ALL love to have answered, “What’s next for rates?”

In the past when interest rates got to these low levels, they almost immediately went back up. This seemed to be the self-imposed floor. Today? Not only have rates held, but they have slightly improved. They might actually get lower this time because:

  • The US economy is definitely not back on its feet and private sector hiring is down
  • The problems in Europe are just getting started as Hungary’s credit rating was down graded and Portugal, Spain, & Italy all share similar problems
  • Analysts are mixed whether or not the bailout for Greece will actually work

Regardless of what interest rates do (and it is anyone’s guess at this point), now is the time to speak with someone to get prequalified to buy a home OR to review your current mortgage to refinance. By doing so, you would be in a prime position to take advantage of interest rates at their current levels OR ready to move at a moments notice if rates continued to fall.

If that is you, I would enjoy the chance to speak with you and get everything in order for your new mortgage.

3% down and no PMI

April 22, 2010

Yes, you read that correctly. Conventional loan, 3% down, no private mortgage insurance, and to top it off… no appraisal required! The program is known as HomePath Mortgage by Fannie Mae and is available to borrowers looking for a primary residence OR an investment property.

Investors using the HomePath Mortgage program need a 15% down payment, but will not be required to get private mortgage insurance or an appraisal on the investment property. Also, the limit on the number of total properties financed in an investors name is waived.

Fannie Mae designed this loan program to facilitate the sale of their foreclosures. There are numerous properties available, and you can search for them here. However, before you find a home and get ready to submit an offer, remember this is a foreclosed property and there are some things to keep in mind:

  • the property is purchased “as is”
  • the property may require some repairs
  • definitely get an inspection!
  • no contingency offers (on the sale of a current home) allowed

All offers must include a prequalification letter. If you are looking to get prequalified, learn more about interest rates this program, total monthly payments, etc., feel free to call or email me. It would be glad to help you through the mortgage process!

A round of applause

April 13, 2010

Seems people like to give the government (President, Congress, Federal Reserve, etc.) a hard time when things don’t go as planned. Rarely  does anyone give them the credit they sometimes deserve.

In regards to the Federal Reserve’s plan to lower interest rates and stabilize the mortgage back security bond market (MBS bonds), the Feds deserve a round of applause.

During the initial stages of the current financial crisis (when the markets were in total disarray), the Federal Reserve stepped in to the spotlight. The Feds announced a plan to buy MBS bonds with two goals in mind – to stabilize the value of MBS bonds and push interest rates down below 5%.  The Feds succeeded on both objectives, extended the program twice (for a total of 15 months), and spent over $1 trillion (yes, that is a “T” for trillion) buying MBS bonds.

The new concern became what would happen once the Feds program ended. Posts on this blog theorized that if MBS bond prices soared (and interest rates dropped) on the announcement of the plan in November 2008, wouldn’t the opposite occur once the Feds were finished buying MBS bonds?

Initially that theory proved to be right. In the first couple of days after the Feds stopped buying MBD bonds, those bonds dropped over 100 basis points in value and interest rates rose 0.25-0.375%. However, as the Feds bowed out of the MBS bond market, other investors have picked up the slack. For instance, since the Feds have kept the Federal Funding Rates near 0%, money managers, pension funds, etc. are moving away from playing it safe and keeping cash “on the sidelines” and are now investing in MBS bonds.

In the end, the plan seemed to work like a charm. The Feds were able to push rates below 5% (back below 5% at the time of this posting), stabilize the MBS bond market, and encourage other investors to pick up the slack as they slowly moved away from buying MBS bonds.

Even though the MBS bond market is now performing without a net, the initial “sky is falling” scare is over and interest rates have rebounded to their levels prior to the Feds leaving the MBS bond market. Who knows how this plan could affect the market a year or two down the road, or how rates will respond if they begin moving in the wrong direction (when they do rise, expect it to be sudden and without much warning), but at least for today, credit should be given to the Feds. Thus far, everything is going according to the plan they laid out. Besides, something bad could happen and we’ll think their idiots again tomorrow 🙂

That was fast – rates on the rise

April 2, 2010

Less than 48 hours after the Feds stopped purchasing mortgage backed security bonds, interest rates have already jumped 0.25% for a 30 year fixed mortgage. For information on the Feds buying MBS bonds or how this affects interest rates, see yesterday’s post OR this one OR this one OR this one… you get the idea.

The trading today has been very limited because of the holiday. That may also be why the Feds chose this date to hop out of the bond buying market. The real reaction will begin on Monday.

Regardless, lenders are pricing interest rates on more of a worst case scenario basis, thus the quick jump in interest rates. If Monday is a flat or good day for bonds, rates may stabilize and possibly move lower. However, most investors are just looking for a reason to doubt bonds and feel it is inevitable that interest rates will continue to rise. Either way, Monday should be interesting.

Waiting to lock?… don’t. As many people have said (including posts on this blog), as low as rates have been, they have nowhere to go but up.

Performing without a net

April 1, 2010

The safety net is gone. The Feds are finished purchasing mortgage backed security bonds, and their direct influence on mortgage rates is over. Is a mortgage rate Armageddon upon us?

Don't look!! It's a long way down.

Well, no, it isn’t. That said, there could be a market “adjustment”, and here’s why…

In November 2008, the Federal Reserve announced a plan to purchase mortgage backed security bonds to lower interest rates into the 4’s. At the time of the announcement, rates dropped roughly a half a point over night. As the Feds began buying these bonds (increasing their value), mortgage rates fell into the 4’s – exactly as planned!

The Feds offered a “safety net” for bond prices. Investors knew that no matter what occurs in the financial sector, a certain amount of bonds would be purchased every week. This kept bond prices steady during this turbulent market.

Now the market’s “safety net” has been removed, what should we expect moving forward?

  • Considering rates dropped dramatically on the announcement of the plan, an opposite adjustment would logically be expected now that the plan is over.
  • Negative overreactions to financial events/data are back into play now that the Feds will no longer spend billions of Dollars each week buying bonds. Who will make up that gap during poor performing days for bonds?
  • What happens if the Feds now look to sell the bonds they purchased (over $1 trillion worth)? Putting those bonds for sale into a market along with the new bonds up for sale will dilute the market, weaken bond prices, and push rates higher.

In short, now that the Feds are no longer buying mortgage backed security bonds, the only direction rates have to go is up, not down. All the experts agree on that, they just don’t agree on how much rates will increase.

What should you do? If you are still holding out to buy a home OR refinance a home while rates are in the 4’s, the time is now. Get started and lock in a rate while these historic lows are still here!

is the (low mortgage rate) party over?

February 9, 2010

The party is just getting started in New Orleans (Super Bowl win + Mardi Gras = month long celebration), but it may soon be coming to an end for historically low rates.

Enjoy it while you can!

Mortgage rates hit historic lows in 2009 thanks to the extraordinary efforts of the Federal Reserve.  Back in November 2008, the Feds announced a program to buy mortgage backed security (MBS) bonds.  The reasons were two fold:

  • to help push mortgage rates lower to stimulate the real estate market
  • to create a market (or in other words, increase the value) of MBS bonds for others to buy

When the plan was announced by the Feds in November 2008, interest rates dropped roughly a half point in one day!  As the Feds began buying bonds, rates dropped down to their historic lows. The initial plan was to buy bonds through the first six months of 2009. It was extended through 2009, and extended again through end of the first quarter 2010.

At their recent meeting, the Feds reiterated their intentions to “seamlessly exit” the MBS bond market with no hint at another extension to the MBS bond buying program.  The question now is “what happens to mortgage rates?”  Take a look at the chart below.

Since mortgage rates dropped significantly on the announcement of the plan, and then continued to improve to historic lows as the Feds purchased MBS bonds, one would logically expect the opposite reaction once the bond buying program comes to an end.  In this case, and at least to some degree, interest rates should rise.

How should you proceed? Anyone who hasn’t refinanced OR is waiting until the deadline to take advantage of one of the home buyer tax credits, go ahead and get prequalified today.  Move forward with the loan now while rates are still ridiculously low.

There is not guarantee rates will dramatically increase, but also no guarantee they will stay the same.  Take advantage of the market and low rates while they are still available.

New Year, New GFE, New Problems

January 27, 2010

As of January 1, 2010, the new, standard Good Faith Estimate (GFE) implementation was underway for all banks, lenders, and brokers was underway. The new estimate design was to clear up any misconceptions or misunderstandings about a borrowers loan terms, interest rate, closing costs, etc.

Some of the highlights of the new GFE include:

– providing a summary of the loan showing the interest rate, term, if the interest rate can rise, if the loan balance can increase even with regular monthly payments, and if there is a prepayment penalty
– showing a total fee for all services required for a loan including lender fees, attorney fees, recording fees, etc.
– containing a graph showing the fees that can’t increase for any reason at closing along with the fees that can change so long as they do not exceed a 10% tolerance limit

The benefits?  That is easy – gone are the horror stories of dramatic increases in closing costs at the closing table… no confusion about the terms of the loan… makes comparison shopping easier than before.

However, nothing in this world is perfect and there are couple of items that could use some improvement on the new GFE.

– Borrowers must receive the new GFE within 3 business days of a completed loan application. Ironically, there is not a signature page for borrowers to sign and acknowledge they received it.
– The total monthly mortgage payment for the loan is not listed anywhere on the new GFE.
– The required cash needed at closing (combination of the down payment, closing costs, and prepaids) is also not listed on the new GFE.
– The new GFE shows an itemized list of the costs for services rendered (total attorney fees, total lender fees, etc.), but does not show an itemized summary of those costs. For example, say the GFE shows the attorney fee is $1,000.  That would include the cost of the attorney’s services, title exam, title insurance, etc., but it doesn’t show the dollar amount for each of those items.

Change can be a good thing, and overall, the new GFE is a good thing for consumers and a step in the right direction. That said, it will take some time to adjust – especially for borrowers looking to buy their second or third home. This format is completely different from their prior experiences!

Be sure to work with a loan originator who knows the new good faith estimate, can explain it, but also offer you some of the missing information – like the total monthly mortgage payment!

one more thing

January 21, 2010

The Federal Housing Administration (FHA) is channeling their inner Steve Jobs with their continued amending/changing of loan guidelines. You know how Steve operates… even though it appears he is wrapping up the annual “state of Apple” speech, he often comes back back on stage saying “one more thing” and proceeds to introduce a new product offered by Apple.

While Steve talks about a cool new product, currently, the FHA releases tighter loan guidelines – definitely not as fun!  No one knows for sure when the tightening of loan guidelines will end, but recent changes include:

  • a 580+ credit score is now required in order to qualify for the minimum down payment of a 3.5%
  • credit scores lower than 580 will require a 10% down payment
  • the up front mortgage insurance premium will increase from 1.75% of the loan amount to 2.25% of the loan amount
  • seller contributions to closing costs will be reduced from 6% of the purchase price to only 3% of the purchase price

As always, it is more important to know how these changes will impact borrowers. Let’s take a look at each of the changes and their potential impact:

  • CREDIT SCORES – While the FHA itself has not required credit scores, lenders have required a minimum credit score of at least 620 for some time now. The lender required 620+ credit score will probably not change, so the FHA 580 credit score requirement will not apply in most cases.
  • UP FROM MORTGAGE INSURANCE – The up front mortgage insurance premium has been required in some form for as long as FHA loans have existed. The up front premium is charged to the borrower BUT rolled into the loan amount – meaning the borrower is NOT paying the fee out of their own pocket at closing. Ultimately this will only slightly reduce the max purchase price of the borrower.
  • SELLER CONTRIBUTIONS – If a borrower only has enough for the minimum down payment on an FHA loan, the seller usually pays the closing costs and prepaids on the borrower’s behalf.  Under the old guidelines, a 6% contribution of the purchase price would easily cover all closing costs and prepaids on the loan.  However, 3% of the purchase price may not cover everything and borrowers will need to find other sources (gift from a relative, low OR no closing cost loan, etc.) to cover any additional funds due at closing.

In the grand scheme of things, these changes should not have a dramatic affect on borrowers qualifying for FHA loans.  It will primarily reduce the amount of house a borrower can afford to buy.

That said, planning ahead becomes more and more important.  Gone are the days of easy financing and no planning needed.  Anyone looking to buy a home using the tax credits (for first time home buyers OR move-up buyers), need to talk to a professional and make sure everything is in order now instead of waiting until the tax credit deadline and realizing (when it may be too late) that there is a potential problem!