All Aboard the Rate Train: Destination Unknown

Are you out there buying a home and your Mortgage Broker is telling you all different rates. Rates varying from 4.875% up to 6% and then back down. I would understand if this type of variation would cause you a little concern and may even cause you to say is this person trying to take me?  The answer is very simple: The market is unstable and has been a rate train without a distinct direction.

Items like oil prices rising 40 + days in a row and job losses appearing to slow down leading to expectations of consumer spending increasing. The largest overlooked factor is the rampant printing of money done by the government. Simple supply and demand here. Increase money supply decrease in the demand. This is especially true from the foreign investor market which is invested heavily in bonds. As the value of the dollar decreases and the other factors increase Inflation becomes a concern. Inflation by definition erodes the value of a fixed income investment ie: bonds.

The Cause: Massive pulling out of the bond market and major sell-off. This is what lead to the sudden hike in the interest rates. That hike scared many of our buyers right out of the market. This is a problem in itself. If buyers vacate the market we will end up with an entirely different problem. We have to have buyers and sales and the inventory is down now but there are many homes in the wing. The banks are releasing these slowly. If they continue to increase the inventory and buyers leave the market oversupply would become an issue. They will not allow this to happen or so I hope. We have already seen them come back down a bit from where they shot too.

Bottom Line: If you are riding the rate train or you are house shopping talk to you lender and ask them to give you a worst case payment. Base what you are shopping for off your worst case pricing. If they go back down get excited and if they stay there you are prepared. Keep in mind that the median home sale in Sacramento County is at 2002 levels. The rates in 2002 were in the high 6% all the way to the mid 7% range. Historically the average fixed rate last time I checked was in the 8% range. Rates have been as high as 18-19% in some cases and homes were still bought. The next time you hear yourself say that is a high rate I urge you to ask yourself  “Compared to What?”

Shopping should be done at the Mall. 5 reasons why shopping can cost you more money.

I love going to the mall. There are so many stores to choose from. I    get  the opportunity to check out all the stores looking for the greatest price. I am there for jeans and I do not have the need for the customer service team to assist me in trying them on. There is little value that staff at the retail stores can add other than an occasional explanation of the product. If I leave a store and then I decide to go back two hours later the price is still the same. Malls are great for a one stop shop and one size fits all type of product. My only question would be: Do you get your suits at the mall? If answer is yes then answer the follow up: Do you leave that day with the suit that you just bought?

Mortgages are an items that need to be tailored to your specific dimensions. They are not something that you can just pick a store and then check with another store and say the price tag was cheaper over here. Price Tags can be deceiving. In our industry they are called the “Good Faith Estimate.” Here are 5 reasons why shopping can cost you more money:

1. Rates are a moving target – In the mall you can go from store to store and then back to the original store and purchase the item that you found to be the most well priced. However, imagine if as soon as you left the store they had a price change for the worse. When you went back to buy the item that was initially $100 you found out it was $125. Had you committed ealrier in the day you would have paid $100. The flip side is you could come back and find the item to be $75 and feel like not only did you make the right choice but you got a deal. This is what is going on with rates. They change daily and in many cases multiple times a day. A Good Faith Estimate is exactly that an estimate. Some will give the the absolute best case scenario and others will price in the volatility of the market. The latter is done to prep you for the worse so that you avoid let down or shock late in the game.
2. Mortgages are Custom – There is not a one size fits all mortgage. They are custom tailored to meet the needs of the individual applying for the loan. When  you are looking at every store and comparing our GFE’s (small part of what we do) there will not be an extraordinary amount of work put into your file. Our job is to shop the best deal for you. This is what brokers do. See the definition of Broker brought to you here compliments of the free dictionary. In short we organize deals and negotiate contracts for a commission. The tailor is not going to begin cutting the suit before you buy it. You may get measured and fitted but the real action will not take place until you have committed. Common ways to show your committment are paying for the credit report and the appraisal for starters and providing all the documents to give you an accurate assessment.
3. Change in the Guidelines – While you are out looking at other stores to find the right deal for you other stores are changing what they offer. Imagine going back to the store and the item that you were looking to purchase says no longer in stock or discontinued. You may be able to find a used version online or from a store that you do not trust but you would have to weigh that risk on your own. Today’s climate has led to many changes in our guidelines. Many consumers missed the boat on Nehemiah. This was seller funded down payment assistance and it has been taken off the books. When you look so hard for the deal you may miss out on the opportunity of your life time. Don’t pick the fleck out the pepper!
4. Credit Scores – Each month just after the 3rd or so your active credit will report to the bureaus. If you have had new charges post to your debts or bought something new or inquired about a new car your score may suffer the consequences. If you were borderline 620 and your score drops below this mark your chances for an FHA have just taking you away from the Mall of options and sent you to one of two specialty stores. You know what that means right? Higher Prices. You are now going to pay more for your product through the specialty store and there is no guarantee that they will be able to stay in the market long. You have to protect your score and when you have it pulled by a Broker they have that score and can use it for up to 90 days before they would have to re-pull a new report.
5. Price is what you pay value is what you get – Often times as a consumer we are shopping for the best price. I can understand and respect this. I don’t want to pay more than I have to either. However, there are many more elements to the whole customer experience. You want to feel comfortable, informed, in the know, respected and Valued. Often times when you get a victory so to speak on the price you take a hit on the value. You will get the bare minimum but that is to be expected considering you paid the bare minimum. So I like to subscribe to the wise saying “Price is what you pay and value is what you get.” You cannot shop value in our market.

If you take nothing away from this at all please understand this: Shopping can cost you more than committing to the individual you feel most comfortable with. Shop for trust and information not for price. Ask someone to refer you to someone that you can be excited to work with. You will find by doing this you will get exactly what you are looking for. Malls are a moving target and are not a fair representation of our industry. We do not sell retail and therefore your rate and price may not be waiting for you when you come back. Leave the mall as something you do on the weekend with the family or friends. We are here to work with and for you not against. Businesses built by Referral receive nothing from charging you an unfair price for their product or service.

The Mall in Motion!

Mortgage Definitions: Lock In and Lock In Period

It is common to hear the terms Lock In or Lock In Period associated with your new home purchase. The terms are very important to your financing and it is important to have an understanding of them.

Lock In – An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.

Lock In Period – The time period during which the lender has guaranteed an interest rate to a borrower.

Previously, we examined different costs associated in Free Mortgage Step Right Up! These costs are either in rate and offered by the wholesaler via yield spread premium or they are paid upfront as pre-paid interest also known as discount. Each morning the investor sets the rates they are willing to sell on the open market based on their risk tolerance. They will set what they determine to be the par rate of the day and build the pricing off that rate. Par rate is generally represented with a 30 day lock defined as the lock in period.

Lock in Periods  are important because they are the time that you are given to execute the funding of your loan at the rate and the cost that you “Locked In” at. The shorter the period of the lock the cheaper the costs for the rate that you are locking in.

For Example: If you were locking the rate 4.75% today on a 15 day  lock the cost would have been .125% discount. The same rate locked for a 30 day period would have cost .250% discount. To give yourself an additional 15 days to get your laon closed it would have cost an additonal .125% of the loan amount. (this example is for illustrative purposes only and may not represent your borrowing position. Rates were on a 30 year conforming fixed rate mortgage with 740 fico, full doc on a single family residence purchase. Please consult your professional regarding your loan specifically.)

The constant change in the market require the investors to at times make midday chnages to the pricing. The imrovements can be for the better or for the worse. There are cases when more than one change can occur in a given day. If you have locked prior to the change you are safe from the change. If the rates have gotten better you are not allowed to get the better rate or pricing that it changes to. On the other hand if the pricing deteriorates you are locked in at the pricing prior to the deterioration. Pricing is time stamped so it is imperative when making a decision you are decisive. See Don’t bend over picking up pennies while dollar bills fly over you head  ! Indecision can prove to be a costly mistake.

For More Reading on Rate Locks, Lock In or Lock in Period you can also read:

Mortgage Locks: Certainly Uncertain! 3 tips to locking your mortgage.

Mortgage Rates Locking or Floating part 2 of 2 by Jeffrey Belonger

As always thank you for reading,

Matt Freeman

Mortgage Locks: Certainly Uncertain! 3 Tips on locking your Mortgage.

When is the best time to lock in my mortgage rate? After all rates are at 3.95% are they not? Heck I think I should wait because the stimulus package is going to help me out and lower the rates to zero. My friend said that they got 4.5% yesterday and I want that rate. I heard that the fifteen year fixed mortgage is 4%. I read in the news that my loan can be modified to as low as 2% and I would like to do that right now can you help me.

OK, I am getting a little redundant but the point to all of the above ranting is simple. Rates are all over the map and they are custom tailored to the individual, the property, and the time that you are acquiring your loan. It is a common question to ask your professional is today the day that I should lock? If they state that absolutely without a shadow of a doubt today is the best day Run!

Larry Baer of Market Alert has this to say: The Market is always right! You and I are some of the time.

In layman’s terms that means to me that you will never be able to time the market and there will always be a rate lower than yours and there will always be a rate higher than yours. Here are three tips that will help you in your decisions to lock your mortgage:

1) If you like it, Lock it – I am a huge proponent of this tip alone. It is your mortgage and your payment that you have to live with for the next thirty years. If there is a payment that you are comfortable with and you like the rate then lock and never look back. Rates are changing by the minute. A swing is rate of a .5% for the worse on 200K is about $62 a month. We tend to think about how much it could go down but I encourage you to remember that we are at historically low interest rates and any rate is a good rate.

2) Don’t Share your business with Friends and Relatives - I am not saying not to be excited about your new home purchase but I am saying to be selective about your excitement. Comparing rates and down payments and programs is certain to hurt someones feelings. As I said before there are always lower and higher rates than your own. If you are the higher rate you wonder why and second guess a good thing and if your lower your celebration has caused others to second guess their dealings. How often do we share our retirement funds or down payment options, or income and credit? That is right we keep the information that tailors our mortgage to ourselves and shout out our rate. Only you and your family have to be excited about your finances and the rest of the world can remain in the dark.

3) Ask your Broker or Banker about Float Down Policies or Rate Renegotiation Prior to Locking – Many of the wholesalers have taken a proactive approach to the market changes. They do not want to lose your business because that costs them money. In order to keep the loan active they are  sometimes willing to renegotiate the terms of your lock. Other wholesalers have a float-down policy in place. They will allow for a float-down of the rate to current market. There is almost always a cost to do this so consult with your Mortgage Broker or Banker on how this applies to your Mortgage.

Just Remember that your Mortgage is yours. It has to work for you and noone else. It is important to be educated and confident in your choices. Choose a Mortgage Professional that makes you feel comfortable with those decisions. You have made a great choice to buy in the current market environment. Take control of that choice be proactive in your education and trust your choices.

As Always thank you for reading,

Oh Where Oh Where will interest rates go?

Seems to me the big talk on the town is what are the rates today and when are the 4% rates coming to town? The answer is I don’t know when the low rates may come or if they even will. The Stimulus Bill has been passed and many expect that to push rates to the all time low 4%. I am not saying that it could not happen but rates today were 5%. What we are waiting on is a 1% drop in rates. That is a big drop.

For rates to drop to this level several things have to occur. Not only does the FED have to buy Mortgage Backed Securities in Bulk but they would also have to deliver verbiage that would make the investor happy. Yes, I have seen the FED control monetary policy verbally. There is a lot of power in the statements the government makes and they have a large affect on the appetite of our investors.

The one thing that I would like to impress upon my buyers the most is that rates trade within a range. There is a high and a low end of this range. Frequently throughout the day or the weeks the rates will trend up and down inside this range until something significant moves the range. Of late the range has been the low to mid fives. These are awesome rates and one should be happy to have a mortgage in the fives. Briefly, I saw the range drop to 4.5-5% but that was very short -lived.

As a buyer you must be aware that the locked rate is attached to the collateral or in your case the property that you would like to purchase. While you are looking interest rates can change several times within a range or even have a range change. Please be in contact with your loan officer to make sure that you know this range and that you  are comfortable at the high end of the range. By doing this you are insuring against a rate moving causing the home you want to be pushed out of your price range. Plan for the worst of the range and your home buying experience will be pleasurable.

No one really knows where rates are headed as “noone” has a true grasp of what is going on right now. The best one can do for themselves is prepare. If you like the home and you are comfortable with the rate and the payment then the time is right for you. Trying to time the market is a guaranteed disappointment. There will always be something that could cause you to say ”Iwish I had………”

Timing the market is buying when the time is right for you.