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Rates on 30 year fixed mortgages have now dipped below 5% for the first time since May.  Many people that wanted to refinance back in May were “waiting” for rates to drop to 4.5 or lower and often were ’shopping’ multiple lenders for a better rate.  It didn’t happen.  Towards then end of May and into June, rates began to rocket upwards and got close to 6% for some borrowers and certain loan scenarios.

With these record low rates, some of those borrowers left behind in May will want to consider refinancing now.  If you were one of those that missed the last dip in rates, there are some things you know and plan for in order to take advantage of the low rates now.  A word of warning, you can not ’shop’ rates with different lenders effectively if you don’t understand the factors that are included in a true rate quote.  Rates are good only for the minute in which they are quoted.  They fluctuate daily, often many times throughout the day.  If a company ‘posts’ rates on their website, rest assured that the ‘posted’ rate is NOT necessarily going to apply to you because a true rate quote will take in a number of factors that are specific to you and your particular loan scenario.

For example, a true rate quote will be based on your credit score, loan-to-value (the amount you want to borrower versus the value of the property), where your property is located (rates are not the same nationwide), whether or not your new loan will require PMI insurance, and whether or not you will be receiving cash back at closing.

Your rate will be higher if you are paying off a first and second mortgage (considered a cash-out refinance even if you are not getting money back at closing) than if you are simply refinancing the balance on a first mortgage.  However, if your loan-to-value is below 70% and your credit score is near 800 or higher, it may not impact the rate as much so as you can see, it’s very hard to compare ‘apples to apples’ if you are trying to ‘rate shop’.  If you have multiple lenders pull your credit report because they need your credit score to provide you with an accurate rate quote, you risk your score being affected.

A much better strategy for the savvy borrower is to shop for a reputable lender.  If you select a good lender and have an experience loan office, s/he will be able to ensure that you receive the best rate available for your specific loan scenario.  Once you’ve determined which lender/loan officer you want to work with, then you can give that loan officer permission to pull your credit report and provide you with an accurate rate quote. 

Also, it is important to keep in mind that if you lock your loan before the appraised value has been determined, you will risk your rate changing as values are very difficult to predict in the current market and the loan-to-value is a key factor in your rate quote.

If you are like the fiesty Ms. Minch of YouTube fame and feel your credit card rate has been increased unfairly, there are a number of things you can do. 

First, get your documentation together, recent payment records, recent bills, any notices received from the credit card company, etc. and create a timeline of events leading up to the rate hike.  If you did, in fact, have a late payment that prompted an unreasonable jump (Ms. Minch’s rate went from 12.99 to 30% which is overkill for one late payment in my opinion), note the circumstances surrounding the late payment.  For instance, if you’d recently lost your job and were late because you were unexpectedly strapped for cash, you need to document it. 

If there was not an ‘event’ that triggered the rate hike, then make note of what ‘reason’ you were give in the written notice you received from the credit card company.  Remember, credit card companies will issue cards stating the rate you will receive on the card and it will often be presented as if you will receive that rate indefinitely, but when you read the fine print, they will state they can adjust your rate at any time.

If you are not in a bind financially and have the ability to transfer your balance to another company’s card or to pay off the account and close it, do it right away.  If you don’t have the ability to do either, with your documentation in hand, call the company.  Note the date, time and ask for the name of who you are speaking with on the phone.  Provide the explanation for late payment or ask why rate was adjusted if there was nothing in your payment history to prompt an increase.  Ask for an immediate reduction to your rate.  If you don’t feel the person you are speaking with is helping you, ask to speak to his/her supervisor or the manager.

Document the conversation especially what you are told regarding your rate if they are going to change it. 

Watch your billing carefully!  Many people utilize online bill pay and since they are not closely reviewing their statements each month or, instead of receiving a paper statement, they get an online notice of their new balance and payment due, the rate may have been changed and they didn’t know it.

There are many consumer protection agencies and legal aid offices around the country.  If you feel you are being treated in an unfair or discriminatory way, contact them and ask for assistance and/or direction.

While the old adage, “he who has the gold, makes the rules”, it is also true that unfair and/or discriminatory business practices need to be addressed and consumers should take action to protect themselves whenever necessary.   

Our hats are off to Ann Minch who creatively fought back on YouTube.com (watch “Debtors Revolt Starts Now”) when Bank of America raised her credit card interest rate from 12.99% to around 30%.  Despite the fact that poor practices on Bank of America’s part and less than stellar leadership from their executives required the US government to “bail them out”, Bank of America’s business practices haven’t improved when it comes to their customers.  This is just one example.

Ms. Minch claims her history had reflected timely payments and an effort to reduce her outstanding debt as she had already paid off one account.  In a 9/29 article on CNNMoney.com, a Bank of America spokesperson stated that a customer receives advance notice of rate hikes and, therefore, the customer has the option to pay off the card at the current rate and close the account.  In most cases, if the consumer had the ability to pay the card off, they wouldn’t have an outstanding balance in the first place.

Unfortunately, Bank of America is not the only credit card company that will suddenly raise a customer’s interest rate without warning causing a significant and often unbearable payment increase.  Many customers with steller credit histories and excellent payment histories find themselves receiving notices of ridiculous rate hikes on credit cards they’ve often had for many years. 

Consumers must start taking action against this type of creditor abuse and speak up.  Consumers should make calls, write letters, go on YouTube.com or whatever it takes if they feel they are being taking advantage of like Ms. Minch.  While there are consumers that default on their unsecured debt, most people are like Ms. Minch and are simply trying to get their debt paid down or off despite difficult economic circumstances or job loss.

First time buyers wanting to take advantage of the $8000 tax credit must contract and close on their new home by 12/1/2009.  While there continue to be persistent rumors that the credit will be extended into next year, until that legislation is passed, borrowers have about another month, at most, where they could potential contract on a home and get their loan closed in time to get the credit.

There is legislation proposed in both the Senate and in the House which extend the credit time-frame and/or expand it to include all borrowers.  It has been a year since the implosion of the mortgage industry with the govenment take-over of Fannie Mae and Freddie Mac, the collapse of Lehman Brothers and many other lending institutions.  The tax credit has been instrumental in bolstering the sales of homes despite rising unemployment.

While we are approaching the slowest sales season for home sales, the holidays and winter months, proponents of extending the tax credit see it as a way to keep the housing market moving forward.  Detractors, however, see rising deficits and increased government spending as problematic for the long-term.

As the legislation stands currently, a first time buyer (defined as someone that has not owned a home in the last 3 years) with an adjusted gross income of $75,000 or less ($150,000 for a married couple) has to contract and close on their home purchase on or before December 1, 2009 to be eligible for the full $8000 credit.

Since June 29, 2006, the Federal Reserve has left the federal fund rate of 5.25 unchanged. Wednesday’s meeting is expected to result in a continuation of it’s stay-the-course policy, after 17 consecutive rate hikes. First quarter economic growth slowed and unemployment went up slightly in April. There is much speculation as to whether the Fed will maintain this holding pattern throughout 2007 or will begin cutting rates in order to keep the economy growing. Most predict that if a recession appears close, rates will be cut.

For anyone with an adjustable rate mortgage, now is the time to consider refinancing into a fixed rate. For the last several weeks interest rates have been creeping downward. 30-year fixed rates are around 6%. If you have an ARM that is going to adjust anytime in next 12 to 24 months, you should consider refinancing now. Take the Refinance Quiz and evaluate your current mortgage needs.

Much of the country is currently experiencing a slump in new home sales as a result of increasing interest rates. The same increase that is slowing new sales will also cause many new homeowners a significant increase in their current payments when their ARMs begin to adjust to higher rates.

In a recent article, CNNMoney.com reported that,

The Mortgage Bankers Association estimates that some $330 billion worth of ARMs will adjust in 2006 and $1 trillion worth will reset by the end of 2007. With a $200,000 loan adjusting upward from 4 percent to 6 percent, the monthly bill would increase to about $1,200, from $955.

A 20% monthly increase in payment would seriously impact the budget of the average homeowner. With recent low rates and flexible loan options that allow for interest-only or minimum payments, many new homeowners stretched their budgets to the max and purchased a more expensive home than they might have otherwise. Few families, even those with two incomes, would be financially comfortable with a sudden decrease in discretionary income of several hundred dollars a month. Many will be strained beyond what they can reasonably manage.

The Libor, one of the most used indices for mortgages, was 1.279 in July of 2003. Now, 3 years later, it is at 5.591, a rate increase of over 4%. Even if a homeowner has a minimum amount of equity in their home and would have to pay closing costs out-of-pocket, s/he may need to seriously consider refinancing now.

It is important for any homeowner, but especially a first-time homeowner to review his/her mortgage note and terms of any adjustable rate mortgage. S/he needs to know:

1. The index on which their rate is based? (i.e. Libor, Treasury, COFI, etc.)
2. What’s the index now?
3. What is the margin on their note?
4. When is the first adjustment date?

With that information, s/he should be able to roughly calculate what the new rate will be and then, by using a free mortgage calculator, determine what his/her new payment will be. If the payment increase causes concern and/or budget issues, the homeowner should immediately contact his/her financial advisor and/or mortgage professional to review financing options and solutions.

While yield spread premiums (YSP) are rebates offered each day by lenders for any interest rate over the daily par rate, the YSP is also the tool loan officers use to offset lender adjustment fees to the consumer. Every loan program with every lender can have “adjustments” to the interest rate or hits as they are called by loan officers. Whenever a loan officer issues a good faith estimate to a client, s/he must be sure to either charge for these adjustments or cover the cost by quoting a rate with YSP that will offset it.

The amount of loan program rate hits can be based on numerous factors such as credit score, loan size, loan-to-value (LTV), property location, loan type (cash-out refinance versus rate/term refinance), etc. These adjustments can total as little as .125% of the loan amount and go up to several percentage points of the loan amount. If paid by the borrower, this could mean thousands in extra fees for closing.

Industry practice is to cover the adjustments by the YSP rather than charge them directly to the borrower. Since YSP’s are usually odd numbers, if the hits or adjustments on a loan are .75% and closest YSP to offset this charge is .875%, the loan officer would be paid the .125% net rebate at settlement. This net rebate is paid outside of closing or POC and does not come out of the borrower’s funds at settlement. It is paid to the loan officer by the lender.

Next, loan program adjustments and their affect on interest rates.

Yield Spread Premium—a percentage of a point that is offered as a rebate on particular rate of interest by a lender. Rate Discount—a percentage of a point charged to the borrower for a particular rate of interest.

Recent news on mortgage industry practices indicates consumers must become not only more educated about the borrowing process but more vigilant in reviewing the information provided to them by lenders. While regulators attempt to protect consumers with an ever increasing number of forms and mandated disclosures, real protection for consumers will only come when they are educated about the process and able to easily decipher the information they are given about their loan terms and settlement fees.

Hidden costs continue to be the bane of most consumers. One item that some consider hidden is the yield spread premium (YSP) that lenders quote on their daily rate sheets. There are those that would claim the YSP is a hidden fee even when it is disclosed on every settlement statement and clearly indicated as being paid outside of closing (POC).

While it is possible for unscrupulous loan officers to use this as a means to make more money on a loan than they would otherwise, reputable loan officers and mortgage brokers make borrowers aware of the YSP and disclose when and where it comes into play during their loan process.

To fully explain how this works, you must understand how lenders quote interest rates on a daily basis. Most lenders publish a rate sheet which shows a rate spread of somewhere between 1 and 2 points. On the lower end, a given interest rate will either cost the borrower a percentage of a point or will offer a YSP of a percentage of a point. The rate closest to or at 0.0 is considered the par rate for that day.

To illustrate, the chart below is what a lender will issue to its loan officers at the opening of each day. Rates can also fluctuate numerous times throughout the day as market conditions change. New rate sheets are re-issued during the course of the day as well. The following rate chart is from a rate sheet issued by a lender this past Friday. These rates are for a conventional conforming 30-year fixed rate mortgage.

Rate 15-Day 30-Day
5.125 3.125 3.250
5.250 2.375 2.500
5.375 1.750 1.875
5.500 1.125 1.250
5.625 0.500 0.625
5.750 0.000 0.125
5.875 (0.500) (0.375)
6.000 (1.000) (0.875)
6.125 (1.500) (1.375)
6.250 (2.000) (1.875)
6.375 (2.500) (2.375)
6.500 (2.625) (2.500)
6.625 (3.000) (2.875)
6.750 (3.125) (3.000)

Reading this chart a loan officer would know a borrower buying a new home wanting to lock a 5.25% interest rate for 30 days would have to pay the lender 2.5% in discount points plus any other adjustments the lender requires for property location, loan size, credit scores, program costs, etc. Par rate for this lender was 5.75% for a 15-day lock. If the borrower wanted 5.75% and to lock for 30 days, it would cost the borrower .125% of the loan amount in discount points.

If the borrower did not want to pay any points for loan origination or loan adjustment fees, the loan officer could quote the borrower a rate that offered a YSP to cover those costs. The yield spread is indicated by the parentheses around the numbers following the interest based on either a 15- or 30-day lock period. If the cost of origination and lender adjustments for credit, program, property location, etc. added up to 2.5% in points, the loan officer could quote a 6.5% rate of interest and lock for 30 days. With this rate, the borrower would have no fees for origination or lender loan adjustments at settlement which would significantly lower his/her closing costs.

Next, lender loan adjustments offset by YSP.

All new buyers getting their first mortgage want to know when to lock their interest rate. Even second and third homebuyers worry over when to lock. While there is not one definitive rule, there are some general guidelines you can follow, no matter what the market rates are doing.

First, most rate locks are for 30 days. Lenders will lock rates for longer periods but you will pay extra for locking your rate for an extended period of time. For instance, if you have contracted on a new construction that won’t be ready to close for 3 to 6 months, you may not save enough on the rate to make up what it will cost to lock it for the extended number of days.

One-time float down deals are good when the market is fluctuating a great deal, but again, you will pay extra for the opportunity to change the rate after you’ve locked-in.

Rates rarely fluctuate more than a half-point at any given time, more often, it changes only an eighth or a quarter of a point up or down. Your best bet, in my opinion, is to talk to your mortgage professional. Find out how much the rates are changing in any given time period. Make sure you’re looking at rates over the course of at least a week or two.

Once you’re within 30 days of closing, your loan officer should watch the rates closely each day and give you regular updates on if or how much the rates are changing. Rates tend to be highest on Mondays and Fridays and lowest mid-week. If there is not much change from day to day, it may be worth waiting until you’re within 15 days of closing to lock your rate. Lenders give a break on pricing at 15 days and, sometimes, another at 7 days. You can save as much as three-quarters of a point in a fluctuating rate market by waiting until closer to settlement to lock the rate. However, for buyers that have been approved with an interest rate cap in underwriting, it may be safer to lock at an approved rate as early as possible, usually within 30 days of settlement.

As with all things, timing is everything. By working with a mortgage professional that helps you understand and monitor current rate trends and changes within the market, you could save by waiting to lock-in your interest rate. Ultimately, unless you’re in a niche or subprime loan program with specific guidelines, when to lock your rate is your choice. A qualified mortgage professional can guide you in making the best choice for your loan circumstances.