Getting the best interest rate
Here is a link to an article that I wrote on Helium.com
"Dirty Little Secret"This article covers some very practical advice for anyone that is currently shopping for a mortgage.
It also touches on a hot spot within the mortgage industry.
Take a read (it is a little long--1500 words). It does give some very practical, actionable advice at the end.
Thansk!
John
Labels: Buyers, Interest Rates, Shopping for a home
Cost of a mortgage
What is the true cost of getting a mortgage? I talk to many people and when the cost of getting the loan done comes up, usually one of the questions is about comparing two different offers. The trouble is that getting two offers structued the same so that you are comparing "apples to apples" is quite hard. There are so many variables that it is hard to set them both equal to each other. In addition, so many of the numbers that go into the deal are not "known" and are only estimates.
I found a great post on
Outer Banks Real Estate. In this post, Mr Roach does a GREAT job of line by line comparing one of his loan offers to another offer. The other offer is not fully disclosing the FULL cost of the loan. This is the "apples to apples" problems that I mentioned before.
Thanks Mr. Roach.
Labels: Buyers, Interest Rates
Subprime loans are a problem
First,
subprime loans are loans that are NOT run through Fannie
Mae and Freddie Mac. They are typically given to customers that have poor credit or other issues like income they cannot document.
The other problem with these loans, and I know this from working with these lenders in the past, is that they usually push Adjustable Rate Mortgages (ARM). The favorite is the 2/28, which means that for 2 years, the rate is fixed. After that, it can adjust. The real problem with this is when there is a 3-year
pre-payment penalty on the back side. That means that for one year (month 25 to 36), you MUST pay the higher payment, but you cannot refinance without paying a huge penalty.
These loans serve a purpose. I have done them and then worked with the clients during the two years to fix their credit and get them into a conventional loan before the interest rises.
That is the main problem with them. You have lenders and brokers with a product and
un-informed consumers. To many (not all) of the lenders and brokers, these are transactions, with the borrower left to fend for
themselves.
Here is an article that points out these problems from a national
economic level.
http://brokerwatchdog.com/2007/02/26/signs-of-a-subprime-mortgage-market-earthquake/Labels: Buyers, General Real Estate News, Interest Rates, Subprime
Inman.com has a Wiki
If you are unsure what a "wiki" is, take a look at
Wikipedia. It is user controlled content. The users of the service write the content.
Inman.com, a nationally known real estate information service, has a new wiki. It is located at
Inmanwiki.com.
I just added the following information on Adjustable Rate Mortgages this morning.
== ARM (Adjustable Rate Mortgage)==
An adjustable-rate mortgage, aka ARM, usually has a fixed interest rate period, followed by a period of fluctuating interest. The fixed period can range from as short as one month to as long as 10 years. ARM's are always linked to an index. These indices are usually published numbers such as the LIBOR rate, treasury bill or bond rates, or the Cost-of-Funds Index. The lender then adds their margin on top of this index. A good place to look at historical index numbers is [http://www.forecasts.org Forecasts.Org].
These loans act just like fixed rate loans during the initial fixed rate period. However, as soon as the loan begins to adjust, things can change and quickly. Lenders differ on margins that are added to the index rate and they differ on how fast the rate can adjust. Recent trends though show that the rates can go to their max rate on the first adjustment, which can almost double your interest rate when you move from the fixed period to the adjustable period.
The strategy behind using these loans are to either maximize monthly cash flow or to get the best rate if you know that your time in the home will be limited. These loans are less popular in times with an inverted yield curve (see [http://money.cnn.com/markets/bondcenter/index.html BondCenter on Money.cnn.com]), because they offer rates that are close to longer term fixed rates, so the risk is not worth the reward. With an inverted yield curve, the short term rates, carry the same or higher risk as the long term rates. Normally, the yield curve shows that rates are lower with shorter terms, which makes sense. If I was to lend you money today for 6 months, I will not loose much buying power on that money over six months, so the interest rate I will charge will be less. However, if I loan you money for 30-years, the money will have significantly less buying power 30-years from now, therefore, I need to charge a higher interest rate. This is inflation risk priced into interest rates.Labels: Buyers, Financing, General Real Estate News, Interest Rates
Getting the best rate
A lot of the national lenders now allow us, as the brokers, to renegotiate a rate in order to keep a deal "in house". IN the past, this was not the case.
The way that it used to work is this. If the client was real sensitive to the rate, we would lock the loan with one lender and if the market changed for the better, we could actually close it with a different lender at the lower rate. This is sort of a "hedging" effect. Of course, this could not be abused because lenders did track the ratio of locks to closed-loans, and if you had too poor of a ratio, they would delete your account. In addition, the unscrupulous mortgage brokers will still charge the borrower the same rate and move it to another lender and make more money on the back end of the loan for selling the customer on a higher rate.
Now, we have the ability to lock a loan and if the market gets better, the lender we locked with will "renegotiate" the rate down to the new, lower rate. For example, if we locked the loan at 6.25% for 45 days, but as it gets closer to the closing, the market rate is 5.875%, the lender will now move the rate down to either 5.875, or at least 6%.
What are the advantages to this? The customer gets the market rate at or near the time of their closing, plus protection from a rising market. The lender gets to keep a loan that they otherwise would have lost. The mortgage broker gets to keep a loan processing through a particular lender. As mortgage brokers, we develop good relationships with particular lenders and we learn how they work. This is important in being able to deliver on the intangibles of speed and ease-closing.
Labels: Buyers, Interest Rates
