Karl's Mortgage and Related Info Site

Two years ago, the Washington Post reported that home loan rates shot up to nearly 7% from 6% in less than a week. The volatility demonstrated that week resulted from turmoil in the financial markets and a lack of buyers for mortgage backed securities (MBS).

That volatility continued through November 2008 when the Federal Reserve announced a program designed to lower rates and provide stability to housing. That program has been incredibly successful, driving rates to the lowest levels of all time. However, as this program will end March 31st, people want to know: Where are rates going now?

Looking for Clarity
This month YOU Magazine turns to Barry Habib, Chairman of Mortgage Success Source, for his viewpoint. Mr. Habib has been very accurate in his assessments of both the financial markets and the direction of mortgage rates, providing education and market information to 30,000 home loan professionals across the country.

Mortgage rates are tied to the price of MBS and like other fixed income vehicles similar to U.S. treasuries, the higher the demand and price, the lower the corresponding rate or yield will be. Therein lies the issue. Throughout 2009, the Federal Reserve was the primary buyer for MBS, purchasing as much as 80% or more of all MBS issued in any given month.

The concern is that when the Fed concludes the program, who will step in to pick up the supply of mortgages for the rest of 2010 and beyond. If investor interest is scarce, look for rates to rise. Also, filling the hole with avid buyers is not the only potential headwind facing MBS and other fixed income investments.

Think About It this Way
Throughout the boom years of real estate, homeowners could just about set any price they wanted when the time came to sell their property. In many cases, simply putting a sign in the front yard would bring multiple offers, driving the price of the home up.

The Federal Reserve has acted in this capacity, supplying heated buying interest for the last fourteen months, in essence, setting the price of MBS and keeping interest rates low. When the Fed stops buying in April, the concern that exists isn't so much that there won't be buyers for home loans but what price those buyers will be willing to pay. The lower the price that new MBS buyers settle on, the higher the rates that consumers will have to pay.

Little Consensus Among Experts
Up until now, the predominant opinion of economists and financial pundits has been that interest rates will rise. The only disagreement has been to what degree and how quickly rates will do so.

On one extreme, David Greenlaw, chief fixed-income economist of Morgan Stanley, expects that rates could climb by more than two points before year end. On the other hand, CNBC has recently paraded people before the camera with the opinion that rates may remain closely unchanged.

Mr. Habib holds fast to his original assertion though that home loan rates are set to rise. "Interest rates for a 30 Year Fixed Rate could rise to 6% by year end and consumers need to be prepared for that." Habib goes on to state that MBS are similar to other fixed income investments that are subject to inflation risk. Inflation erodes the value of bonds and forces rates to rise.

Inflation risk exists not only from the possibility of an improving economy but also increased debt coming from the U.S. Treasury to support stimulus packages and the budget.

One More Thing to Consider
The purchasing of MBS by the Fed does not occur immediately after a loan closes. Several weeks must pass after the consumers close on their mortgages before they can actually be delivered, packaged and sold to investors like the Fed.

Because of this, many people anticipate that any potential move higher in rates may not occur until April 1st, after the conclusion of the Fed program.

Habib states that this is not the case for many reasons. Rates have already started to move higher over the past few months, and will likely increase a bit more after the Fed stops buying - not just because the largest buyer is absent, but because speculators will be less confident and unload their positions ahead of the deadline. This gradual increase combined with what we've already seen will be meaningful, and as the year progresses, rates will oscillate higher still. It's like walking up a long staircase...you don't realize how high up you are, until you turn around and look down.

What Now?
If you are a candidate for refinancing your mortgage, call your mortgage professional today to lock in your best opportunity for a low rate. In addition to the potential for rates to rise, there are also other programs in place...that are scheduled to end in June...to assist people who otherwise could not refinance due to loan to value.

For prospective home buyers, any increase in interest rates erodes your purchasing power. In other words, a 1% increase in rate represents an approximate decline in purchasing power by 10%. For example, if rates increase by 1%, people who qualify for a $200,000 purchase price today may only qualify for a purchase price of $180,000 afterwards.

For those who qualify for the tax credit for first-time and repeat home buyers, another deadline also exists. The last day to obtain a contract to qualify is April 30th and closing must occur by the end of June. Miss either deadline and it could cost you up to $6,500 or $8,000, depending on eligibility.

No matter which way you look at it, waiting could cost you. Mortgage rates are still near the best levels we have ever seen. If you are in the position to move forward with obtaining a mortgage, the best decision would be to act sooner rather than later.

Karl Peidl
Accredited Loan Consultant
Pleasant Valley Home Mortgage Corp.
Phone: 856-252-1224
Cell: 609-254-6687
kpeidl@pvhmconline.com
www.karlpeidl.com

New Jersey: Licensed by the N. J. Department of Banking and Insurance Delaware: Licensed Lender by the Delaware Office of the State Bank Commissioner.

Understanding What Causes Interest Rate Movement

The Federal Reserve constantly evaluates the US economy and, when necessary, takes steps to address inflationary concerns and avoid economic recession or depression. The mass media, in turn, reacts by providing a wide range of opinions and interpretations of the Fed's monetary policy. This can make it very difficult for consumers to decipher how such actions will influence interest rates in general and mortgages in particular.

And although actions of the Federal Reserve can have a direct impact on the Prime rate, mortgage interest rates are dictated by the trading of mortgage-backed securities, which are similar to bonds and trade on a daily basis. This means that the real dynamic at the heart of interest rate movement is the competitive relationship between stocks and bonds.

Stocks, bonds, and mortgage-backed securities compete for the same investment dollars on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling off of other investments, including mortgage-backed securities.

Unfortunately, when mortgage-backed securities are sold off to fuel stock market rallies, this causes interest rates to go up, not down.

Historically, there have been many instances where the Federal Reserve has increased interest rates, arousing fears that corporate profit margins would be affected. This resulted in stocks being sold off, leading money managers to search for a place to invest their newly liquidated assets until the next market rally. One such safe haven has been mortgage-backed securities, which cause mortgage rates to drop.

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a trusted advisor.

If media reports have led you to second guess whether it's a good time to purchase a new home, give me a call. We'll analyze your financial situation together and create a plan that's right for you.

When a borrower enters into a contract to make bi-weekly payments on their mortgage, the amortization schedule is accelerated. For example, with a 30-year amortization schedule, the borrower makes 12 payments per year. In a bi-weekly arrangement, the borrower makes 26 'half' payments, which allows the loan to be paid off in 22.8 years instead of 30 years. It's the same as making 13 monthly payments.

This ultimately saves the borrower thousands of dollars in interest rate fees. However, bear in mind that bi-weekly programs usually have some type of setup, transaction, and maintenance fees associated with them. A custodian manages the bi-weekly payments in a trust account (and also makes a profit on the interest accrued there). Because the lender really doesn't accept partial payments, this middle man is still making monthly payments to the lender on some type of pre-payment schedule.

It is important for the consumer to know that the same results can be achieved without hiring an outside company to do this. As long as your loan program carries no pre-payment penalty, pre-payments can be made on a monthly or annual basis to shorten the loan term to save money on interest or remove PMI charges on loans that have less than a 20% down payment. The borrower simply needs to indicate the extra payment is being made toward the principal balance, and have the discipline to make these extra payments as scheduled.

If you're selling your home, make sure your home has "curb appeal." Remember, you can't change a first impression. If your home looks like a diamond in the rough, think about putting a small investment into cleaning up the outward appearance.

Imagine that you are seeing the property as a potential buyer. You'll want to do a little yard work - clear away dead shrubbery, and trim your trees and lawn. Weed the flower beds or plant some flowers that will bloom in season. Make sure the driveway is not stained, and if you can't afford to paint the home entirely, at least make sure the front door and immediate entryway is immaculate.

Fresh and clean are still the keywords to making a good first impression once the potential buyer walks through the door. Unless a particular window is facing an eyesore or a neighboring building, open the drapes and let the sun shine in! Put your dog in the back yard or garage so he's not jumping on the new people who just walked in.... they might have allergies! There is much you can do to improve the look of your home, without investing a great deal of money.

Call me to get a copy of my pamphlet, "33 Ways to Sell Your Home Fast." I'd be happy to share more tips with you and assist you in obtaining financing for your next home as well.

Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months.

Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.

When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.

Ever have a friend or family member ask you for a loan? It can be awkward and may lead to a strained relationship. So before you decide to be a banker, consider these steps to help avoid a potentially ugly situation.

Don't Commit Right Away. When asked for a personal loan, don't say yes right away, especially if the sum of money is large. Instead, tell them you would like to help and explain that you need a few days to review your financial situation before you make a decision. Perhaps another solution will come to them in the meantime.

Just Say No. If possible, try to avoid lending the money. Try to provide an explanation that will not hurt your relationship. You may want to consider offering to help in a non-financial way or giving a smaller amount as a gift, with no expectations of repayment. This allows you to be generous on your own terms and removes the potentially heated issue of non-repayment.

Be Specific. If you do decide to extend a loan, set clear expectations for repayment. And don't beat around the bush... be very specific about the term of the loan, interest rate, payment plan, and even the penalty that will be incurred should a payment be missed.

Get It In Writing. Always put the terms in writing. A written agreement reinforces that you are serious about the repayment terms discussed, and it prevents any potential misunderstandings.