Home Loan Focus

Archive for the ‘rates’ Category

So the Federal Reserve dropped its rates that are charged to banks and you would expect that mortgage rates from those banks to consumers would drop as a result.  After all that is the pattern of cause and perceived effect that has taken place in the mortgage industry for about the last 16 years.

There are unfortunately two big problems that are actually causing mortgage interest rates to fall Up, as in rates are going up not down.

Freddie Mac, the mortgage company, reported Thursday that 30-year fixed-rate mortgages averaged 5.88 percent for the week ending April 3. That was up from last week’s 5.85 percent and was the highest since the middle of March, when 30-year rates stood at 6.13 percent.  ~ Associated Press

The first is that banks are finally starting to recognize the risk that their consumers bring to the table.  You may have good credit or even decent credit or maybe you have sketchy credit.  But the bank looks at a pool of borrowers, and right now at this moment in history foreclosures are rising in many areas.  Like a group of people trying to warm up a pool together, the risk that banks take on in aggregate is being heated up by the people already in the pool letting go of their mortgage obligation.  So the bank has to pay for that loss, and the only way they can do that is by reflecting the new rate of real risk in their mortgage rates.

Then there is an even bigger problem that is starting to hit banks albeit more slowly.  Its called inflation.  You can see it at the pump and you can see it at the store when you buy a gallon of milk for $5.75 a gallon(local Wal-Mart price last week off sale).  Banks have to set mortgage interest rates to cover the risk of the borrower and they have to set interest to cover the risk of inflation and the decline in value of the dollar.  Well guess what, inflation is slowly coming and the dollar is dropping in value.  That means if you borrow $200k today and pay back $200k tomorrow, the bank is going to lose a little money on the transaction.  Spread those payments out over a normal mortgage period and they will lose even more in the short to medium term.

So that has mortgage rates going up.  The trend of where this will fall out is anyone’s guess.  The Fed’s reductions normally can take 3-6 months to actually have a direct effect on the mortgage rates offered to consumers too.  So that means that the recent reductions the banks received may not show up in offers to you until July.  However, if the banks risk increases during the same time and inflation increases, then the Fed’s drop in rates may be completely consumed and you will not notice a positive move at all.  So if you were hoping to pay for some good vacation deals this year based on the money you would save on a lower mortgage rate, you might have to think again and instead find some ways to tighten up your belt buckle to ride this one out at home.

The Federal Reserve has moved interest rates down 1.25 percent or 125 basis points within 2 moves of .75 and .50.  Many people now feel that the Federal Reserve is likely to move yet another .50 percent the next time they convene maybe even sooner if some bad news comes our way first.

Planning to Refinance – Target July

Now for rate cuts to work their way through the banking and mortgage system, it usually takes about 6 months.  The banks have the technology to make decisions and actions faster.  They often times choose not to do so and only move under competitive pressure from their rivals.  In the mean time they will benefit themselves from arbitrage (getting their own better interest rate deal via the Fed and NOT passing that on to consumers).  Essentially for a few months, as long as they can hold out, they will pocket all the profits from the rate cut. 

Banks will not move their own interest rates down until their greedier volume hunting rivals start trying to take some of their business away with lower rates and offerings.  So the race to the bottom probably won’t kick off for another month or two and then it historically takes about 6 months to work its way through the system.  So if you are in a hurry to refinance, but you can hold out safely until summer, you could end up getting a better rate.

You will need to compare the potential savings then versus the savings that you forego in refinancing now. If you are financially strapped you should also consider whether or not you can keep paying your bills as is.  If waiting 5 months might put you in the danger zone, then consider refinancing now and maybe again in a year.  This might enable you to stair step your way down to the lowest rate possible.

In a future article we are going to talk about the importance of performing a Phase I Environmental assessment on certain types of properties before you buy.

There was an anemic improvement in the housing market in November.  Home sales increased from 4.98 million to 5 million homes.  This happened at the same time that 30 year mortgage rates dropped from 6.38 to 6.21% in November.

There were other small but positive signs in the housing market as well.  The number of homes available for sale dropped to 4.27 million homes, about a 10.5 monht supply.  This indicates about a 3.6% drop in a bloated housing market that never heard of ephedra diet pills.

There was some bad news, the median home price dropped from $217,300 in November of 2006 to $210,000 in November 2007.

Among other things it should be noted that a pick up occurred in the presence of two historically significant factors, lowering house prices and lowering mortgage rates.

Existing-Home Sales Edged Up In November, but Remain Weak – WSJ.com

Quicken Loans offers up a short and somewhat useful article detailing how the recent Federal Reserve’s Rate Cut might impact your mortgage.

Now, I personally do not trust Quicken Loans as they once promised me a rate on my own home refinance.  I locked in at the rate and 2 weeks before the close they called to tell me that it was no longer possible unless I paid a higher interest rate.  They offered up excuses that were unprovable, but the reality was that it was either their way or the highway. 

I chose the highway and refinanced with Wells Fargo instead!

Regardless, their short article Does the Fed rate cut affect your mortgage rate? offers up the examples necessary to understand how the Federal Reserve Rate Cut a can impact your finances ( a little ) both positively and negatively.  The article is not likely to save you a fortune this year or even save your house from foreclosure if you are in trouble, but understand the situation might save you enough money to buy a truck rack on clearance from an after christmas sale.

The key concept to understand is that the Federal Reserve has the ability to impact short term interest rates.  Here are some loans that may be impacted in the short term:

Credit Cards
Adjustable Rate Mortgages (ARMs) – under 7 years, even more if 3 or under
Home Equity Lines
Some (but not all) Student Loans
Your Savings Account rates
New Vehicle Loans – Ergo new loans that you take out as opposed to the loans that you already have.
Other Lines of Credit – such as Overdraft Protection

Lower fees, easier process, less credit checks or income verification, all of those things probably mean that you are going to pay a higher interest rate on your mortgage.  Lendors are like the mob in that they always take a sure bet, and their bets can be assured when they charge you enough interest to profit!

This video is a little dated, but the concept can definitely be extrapolated even in today’s mortgage crisis world.  Just because the industry is in ‘crisis’ over sub prime, it doesn’t mean they are not going to have a profitable year.  If Las Vegas could come up with a great idea to run into ‘financial trouble’, I’m sure they would like to go to capital hill for a bail out too!