Thursday, May 24, 2007

What Happen to those Interest Rates???

Oh so you heard that mortgage interest rates have sneaked up a bit??? Wondering if you should call the 800 number or log onto the website of that mortgage company offering 1% mortgage money??

I am not surprised that either statement might be true for you. Yes, the mortgage rates are up to the 6.5% range now but do you know that is still historically low? Actually any rate below 8% is considered awesome if taken in historical context. Just ask someone, maybe your mom or dad, about the mortgage rates in the 80's. Could you imagine 18% rates???

So if your sitting on the fence and wondering "Is now the time to buy?", here is some food for thought. If you bought a $300,000 house and took a loan at 6.5% interest for 30 yrs vs 18%, you would save over $2100 per month!!!! Yet lots of couples and individuals bought their first or their 4th home in the 80s....so do we have it good.

Yet, rates do need to be monitored as they move with the market. Though mortgage interest rates are directly tied to 10yr bonds or the movement in the stock market, the direction and volume in these two items can directly impact. Think of like this, if breakfast cereal prices go up to the upswing in Ethanol production, we know they are tied directly together as they are two different uses for grain...yet the lowered availability of a limited production of corn, for example, to make Corn Flakes could very well cause the price to increase at the grocery store.

Same is true in the financial world but a bit in reverse. When the stock market is humming, as it has been now(do you know it hit a record high yesterday prior to retreating?), the 10yr bonds must over a better rate of return to attract the investor. This causes mortgages to rise as they are bundled into marketable securities after you or I get our mortgage and have to compete to get the investor to buy the security. Seem complicated...it is....this barely scratches the surface but hopefully helps.

Knowing whether the rates will go up or not is a tough item to predict. Can we guarantee the Stock Market will continue to rise or that it will drop 400 pts in a day? Probably not...or we would be rich shortly if we knew the time and date. Yet, because we don't know, buyers and sellers alike need to know that a 6.5% interest rate today will change tomorrow. In fact, most banks establish "the day's rate" around 10am each business day!

If a buyer waits and the rate drops a 1/4 % to 6 1/4%, he/she would save approx. $41/month on his $250,000 note. But it jumped a quick 1/2 to a still historically low 7%, he/she will pay an additional $84 per month. So what's your bet?

Before I forget, let me give you a hint about mortgage rates. For "A" paper loans(standard Conventional, VA and FHA financing) the rates are pretty much a direct reflection of the rates
Ginnie Mae and Fannie Mae will accept(complicated to explain relationship between these quasi-governmental bodies) and what the banks can offer. That is where the rub comes when you see an ad for 1% mortgages or 3.25% mortgages or a loan broker tells you he can get you a 8% loan in a 6.5% market.

Though I or any one can't say the following is true for every situation but caution is needed.
Frequently when a 1% mortgage is offered, that rate is good for a month and will increase based on a basis such as Treasury Bonds. Or it could be 10yr note with negative amortization; as you pay 1% interest on your loan, 5.5% of the value of the loan is added back into the loan each month. Yes, this would increase the payoff balance on the note each month...you would have to know you are going to make alot more money or that the house will appreciate rapidly to meet the new loan balance(you have heard home prices are steady to dropping a bit?).

Situations such as this is why I always point my clients to a Mortgage Company that loans its own money. So the fact the name of the company is "X Mortgage" doesn't tell the story.
There are companies linked to banks like Suntrust or Wachovia as well as mortgage companies aligned with a Realtor company, such as Advance Mortgage that is directly underwritten/financed via Wells Fargo. Also you will find fine mortgage companies like Countrywide Mortgage or Atlantic Bay Mortgage that have large investors/stock based company that loans its own money. For all these type of companies, you always want to ensure you know if you are talking about "A" Money or "B" Money, as these companies do have "alternative" financing options for individuals with no downpayment or lower than 600 credit scores(yes the credit score counts!). Good flexibility to meet all borrower's needs but it is good to know which type of money as it can impact fees and rates charged.
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