Simply The Best Loans

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.

Adjustable Rate Mortgages have been very popular over the last few years. When interest rates are going down, they are very favorable. The most popular of these programs have been the 3/1 and 5/1 ARMs with interest-only payments.

Alan Greenspan has warned homeowners who used hybrid loan programs, which allowed for no downpayment and interest-only payment options, to purchase their homes may be in trouble with interest rates on the rise. A recent Washington Post article by Nell Henderson, overviewed Greenspan’s acknowledegment of the impact Hurricanes Katrina and Rita will have not only on the U.S. economy but on the economy world-wide. In addition, Henderson’s article references Greenspan’s comments to Japanese executives in Tokyo, which agree with predictions that higher energy costs will force consumers and businesses to cut spending.

Once consumers and businesses begin to cut spending, the economy slows. Companies may be forced into freezing wages or laying off employees. If the Fed continues to push interest rates up and inflation increases, consumer budgets will be further strained. Even with conservative estimates, those with an adjustable mortgage could be facing up to a 30% increase in their monthly payments as rates continue to rise.

Salary increases have been fairly flat in recent years. Businesses facing rising costs usually reduce spending, therefore, salaries are not likely to increase. If you’re facing the potential of an adjustment in your interest rate in the next 2-3 years, refinancing into a fixed rate now may save you from having an over-extended budget later.

For homeowners who commute 30 minutes or more to work one-way, gasoline prices have already put a dent in their discretionary income. As the costs other goods and services continues to increase due to higher fuel costs, budgets will tighten even further.

There is no one-size-fits-all solution to these problems but proper planning now can prevent agonizing over your bills later.

Things to consider:

1. If you have an ARM, is it already adjusting or is your fixed period going to expire within the next 2-3 years? If so, talk to a qualified mortgage professional or other financial advisor about the potential benefits of refinancing into a fixed rate now.

2. Do you have a significant amount of unsecured debt? If so, begin paying that debt down. The less unsecured debt you have the better off your long-term financial picture will be.

3. Do you have a pool of emergency funds that can cover all your expenses for several months if you have an unexpected loss of income? Pay yourself first, even if you are trying to reduce your credit card debt, make sure you are putting some money away each month for emergencies and retirement.

4. Are you expecting to fund your child’s college education? Re-consider this plan. You may be better off investigating other ways for your child to get a college education and saving for your retirement instead. There are numerous scholarship, grant and financial aid programs that can allow your child to get his/her education without you bearing the financial burden. Work-study programs also provide students with the ability to gain real work experience while paying for their education.

5. Do you have an equity line of credit? If the rate on your equity line is increasing rapidly, you may want to consider refinancing into a fixed rate 2nd mortgage or refinancing your 1st and 2nd into one loan with a fixed rate. A mortgage professional or other financial advisor can help you determine if the aggregate APR will make such a move cost effective.

6. Do you have a financial plan, goals? If you do, great, review them. If you don’t, begin establishing your goals and the plan necessary for you to meet them. Be realistic, but plan positively. Look at things like your income, debt, net worth, savings plan, retirement plan, investment strategies and seek the help of a qualified professional if you’re uncertain what to do.

7. Evaluate your current budget and spending habits. Where can you make changes that will have a positive impact on your bottom line? Knowing what, where and how you spend you money can mean the difference between financial security and financial disaster.

8. Save for what you want! Before credit was so readily available, people who wished to buy a new living room set, go on a special vacation, or purchase a new car, saved up for it. By budgeting and planning ahead, you can prevent over-extending yourself and creating unnecessary debt.

Associated Press reported Freddie Mac’s recent annoucement that 30 year mortgage rates have risen to their highest level since March. Currently at 5.98, which is up .7 percent from last week, according to nationwide averages.

Rising interest rates are the result of the Fed’s strategy to keep inflation under control. As natural disasters have severely impacted our ecconomy in recent weeks, the Fed’s strategy may not provide the expected relief. Additionally, higher rates and increased fuel costs are further eroding the discretionary income of consumers. Many are tempted to limit or put off saving due to more immediate financial pressures.

Now, more than ever, it’s time for individuals to take the long view and save for their future. While Americans commonly plan for shorter-term expenses such as college funds for their children, they routinely fail to plan appropriately for their long-term financial needs.

For further insight, read Matt Branaugh’s, article “Save for Retirement First, then for College” on www.delawareonline.com.

Personal Finance

Are you conflicted, unclear as to the direction mortgage interest rates will take? Do you wonder if Greenspan’s conundrum will continue?

Frankly, your guess may be as good as those who routinely predict these things. I’ve seen opinions indicating rates are going to skyrocket upwards to those believing bond yields will send them even lower. Overall, my best guess is mortgage rates will continue to remain reasonably stable. Why? A number of reasons.

As financial markets anticipated a higher level of economic growth, 30 and 15 year fixed rates rose during the past two weeks. Essentially, 30 year rates rose from 5.62% to 5.66% while 15 year rates went from 5.20% to 5.25%. Still, those rates are almost a half point lower than the average rates of a year ago.

The gearing up for greater growth in the economy may have been, ultimately, somewhat premature, as the softer-than-expected inflation rate report failed to boost the market.

“A further rise [in fuel prices] could cut materially into private spending and thus dampen the rate of economic expansion,” said Greenspan.

With crude oil prices averaging around $60 a barrel and showing no signs of decreasing, higher gas prices will continue to strain the budgets of both businesses and individuals. The effect is overall higher costs on all products and services which could prevent further expansion and growth in some areas of the economy.

Greenspan also said that low long-term interest rates have “continued to provide a lift to housing activity.”

During the past several years, one of the strongest areas of economic growth in this country surrounded the housing market. Low rates and flexible loan program options gave many Americans their first opportunity to buy homes. Homeownership provides a foundation for a stronger, more stable economy.

With this in mind, I believe that interest rates dropping to new record lows is unlikely, at the same time, I also feel that even as the market improves and the economy continues to stabilize, long-term rates for mortgages will remain steady and affordable.

Gail Liberman and Alan Lavine of the Boston Herald offer the following “Rules of the Road for Bond Prices and Interest Rates”:

Consider these rules when you invest in bonds.

Bond prices and interest rates move in opposite directions. Bond prices fall when interest rates rise and vice verse.

Selling a bond? The longer its maturity, the greater the price change, based on interest rates. When interest rates rise, long-term bonds lose more value than short-term bonds and vice verse.

The lowest-risk bonds, if you hold them to maturity, are U.S. Treasury bonds. Sell them early, however, and their value also fluctuates, based on interest rates.

If interest rates rise by 1 percent, here’s a general idea of how much the value of your bond may drop if you sell it.

A two-year U.S. Treasury bond:-2 percent.

A five-year U.S. Treasury bond: -4.25 percent.

A 10-year U.S. Treasury bond: A little over -7 percent.

A 20-year U.S. Treasury bond: -10 percent.

A 30-year U.S. Treasury bond: -11.5 percent in value.

Keep in mind that the interest your bond pays should offset some of the decline.

Spouses Gail Liberman and Alan Lavine’s latest book is Rags to Retirement (Alpha Books). You can e-mail them at MWliblav@aol.com.