Category Archives: Mortgage Rates

Buying a Home for the Holidays…

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Oh there’s no place like home for the Holidays…The holiday season is often hectic with festive decorating, shopping for gifts, attending holiday parties, and so on, as we practice our family traditions. But when we slow down a moment, we generally acknowledge that the season is really about friends and family and the memories we create.

There’s no place like home for creating memories. And no place like home for the holidays. While it may sound a bit crazy to add this to your shopping list… this holiday season could be the very best time in history to give yourself the gift of a new home.

While there are a number of advantages to purchasing a home, and especially during the holiday season, there is a confluence of factors that make this years season a bit more special than past years.

Rates at Historic Lows
Interest rates have been dancing around the all-time-low mark for some time. But did you know that rates hit the lowest ever in October? This season, rates are about 0.5% lower over this time last year – which translates to a payment savings of approximately $60 per month on a $200,000 mortgage for qualified borrowers. While $60 might not seem huge, add that up over time!

Today’s low rates give you an increase in buying power no matter your price point. There was some speculation that rates may move lower, however inflation fears and concerns of this new QE2 stimulus has pushed rates higher for the past month. As rates increase, and they will continue to do so…your buying power will diminish.

Home Prices at All-Time-Lows
Once school begins in the Fall, the real estate market tends to slow down and by the holidays, it is at a snails pace. The lack of buyer demand is reflected in home prices as sellers become anxious. Homes are more affordable now than at any other point in time since 1970 according to the National Association of Realtors’ housing affordability index. During the holidays sellers may reduce prices further or offer additional incentives.

Lawrence Yun, chief economist for National Association of Realtors said home sales still remain subpar. He explained, “The housing market is trying to recover on its own power without the home buyer tax credit. Despite very attractive affordability conditions, a housing market recovery will likely be slow and gradual because of lingering economic uncertainty.”

Sellers Are Motivated
With the current economic slowdown many sellers are willing to negotiate – not just on price, but also may be more open to entertain request for other concessions such as appliances, or paying closing costs. In addition, they may be eager to get the home sold prior to the holidays to avoid scheduling their holiday plans around viewings by prospective buyers. This may give you extra bargaining power.

Once home prices stabilize and begin to improve, these same sellers will be less willing to bargain. As Warren Buffet has said, “be fearful when others are greedy and greedy when others are fearful.” Once the market begins to improve, Sellers may become greedy as buyers panic to secure home purchases as prices start to climb.

Plenty to Choose From
While real estate is local, most markets remain saturated with inventory. Being in the buyers shoes right now is akin to being a kid at Christmas – all the choices make it a bit overwhelming.

If you’re serious about buying a home, the first step is to define what you are looking for in a home and at what price (and get qualified!). Once you find it, be willing to negotiate a fair deal and grab it. Waiting around for things to improve from here could cause you to lose the opportunity on that “perfect home”. It’s important to remember you are not looking solely for the best deal…but the best home.

Tax Advantages
Buying a home can give you a tax break. Here’s how: Mortgage interest (including points) and real estate taxes are tax deductible. That doesn’t sound very sexy, but it adds up. Since most of what you pay for your mortgage in the first years is interest, on a $200,000 mortgage at 4.25%, you get to deduct about $700 a month in interest. That reduces your taxable income by about $8,400 a year. If you’re in the 25% tax bracket, that deduction is worth about $175 a month.

To see the benefit, you can either wait for a big payout after you file your income-tax return, or adjust your withholdings and keep your hard earned money. Your employers benefits department can help you with this.
Closing on a home purchase before the end of the year may provide you some additional tax deductions for the current year. You may be able to deduct any money you pay for points to reduce the interest rate on your loan. Consult your tax advisor to see how the mortgage interest deduction applies in your situation.

Getting Started…
Buying a home during the holidays could benefit your wallet for years to come, and there may not be a better time than now. If you are thinking of purchasing a home during this holiday season, get started now and discuss your options with your loan professional.

While interest rates and housing remain at historic levels, keep in mind: They won’t stay this way forever. Spend time reviewing your situation today. After all, there has never been a better time in our history to purchase a home.

Printing Money Leads to Higher Mortgage Rates

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Mortgage Interest Rates have taken a beating since November 4th, reaching their highest level since August. What we are seeing is a result of Quantitative Easing, round 2 (QE2). As I began writing, I watched this hilarious video QE Explained, which is an entertaining explanation of what’s happening. Enjoy.

So…now that you know all about QE2…how does this relate to mortgage interest rates?

Part of what we are seeing play out is the old-timer-trader adage “Buy on the rumor, sell on the news,” as previously discussed in an earlier post. QE2 was anticipated well in advance and investors jumped in and gobbled up debt prior to the announcement. Now we are seeing a sell off driving mortgage interest rates higher.

Keep in mind that the Fed’s goal for QE2 is to create inflation, lower the unemployment rate, and boost Stock prices. Inflation is the arch enemy of bonds and will drive mortgage interest rates higher as it begins to present itself. Once the inflation genie is out of the bottle, it can get out of control very rapidly, which will drive mortgage interest rates higher.

And if there isn’t enough nervousness already, this past Sunday former Fed Chair, Alan Greenspan warned of a looming bond crisis on “Meet the Press” which sent shock waves thru the markets when they opened Monday morning. Greenspan warned that the US is on a path that could lead us to a Greece-like story.

At the same time, we are seeing hints of improved or decent economic data which puts upward pressure on mortgage interest rates.

There is an expression – “don’t fight the Fed” – everything the Fed is trying to accomplish in QE2 is not bond or mortgage interest rate friendly and goes against any meaningful improvement in the Bond market. So the advice for now is to keep your seat belt on, this could be an extremely bumpy ride!

Mortgage Rates Jump Along with Housing Sales

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Mortgage Interest Rates took a beating yesterday as Flower Mound, Texas lenders scurried to lock in rates for clients. Bonds look to be getting more of the same treatment today from changing sentiment towards the risk of inflation.  It seems investors are now betting the Fed will be successful in “creating inflation” with their upcoming Quantitative Easing that is expected to be announced next week. Read More about Quantitative Easing.

Inflation is the Arch Enemy of Bonds
For months there has been an ever-growing fear that our economy is headed straight for deflation…where prices on goods and services fall lower rather than climb higher, which is inflation.  These fears of deflation have helped Bond prices move sharply higher…and home loan rates move lower.  You see, the fixed payment that a Bond provides to an investor purchases more goods and services in a deflationary environment, thus investors flock to Bonds as a “safe haven” during periods of low or no inflation.

Just yesterday there was a headline talking about how another round of Quantitative Easing (QE2) contains the risk of unleashing a 1970′s-like “inflation genie.”  Not sure if you remember those double digit inflation years – but it was ugly.

In just 24 hours the outlook on inflation has changed dramatically!  Bonds dropped yesterday, like a rock…and continue in their free fall this morning.  As the Bond moves lower, home loan rates move higher. If you haven’t secured a low rate with your Texas refinance, now is the time to do it!

Housing Picks Up the Pace
This is happening on the heels of some positive data in housing.  Both Existing and New home sales edged higher in September.  In addition, the supply is finally starting to slowly edge down, which is good news since the market has been over saturated.  Keep in mind…real estate is local, local, local.

It’s Not Too Late!
Keep in mind, this recovery is likely to be choppy at best.  We will be riding a bit of a roller coaster ride as we take two steps forward and one step back.

The good news is this:  although the best rates in history are in the rear view mirror, and unlikely to get much benefit from QE2, rates are still GREAT!  It’s not too late to take advantage of this unique time in history.

Will Mortgage Rates Move Lower with QE2?

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Mortgage Interest rates remain at historic lows in Flower Mound, Texas and around the country. This low level mark breeds complacency among many, especially with the buzz in the air that mortgage interest rates may go even lower. But the question hangs in the air, like thick humidity on a southern summer day – can mortgage interest rates go lower in Texas?  And if there is a chance, just maybe, maybe, they will…should you wait and see before purchasing or refinancing?

More Quantitative Easing
The buzz stems from talk coming out of the Federal Reserve indicating they may be ready to begin another round of Quantitative Easing in an effort to stimulate the sluggish economy.

What is “Quantitative Easing”?  Here is what Wikipedia says:
The term quantitative easing (QE) describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.
“Quantitative” refers to the fact that a specific quantity of money is being created; “easing” refers to reducing the pressure on banks.

The first round of quantitative easing, implemented during the credit crisis, the Federal Reserve bought Mortgage Backed Securities (MBS) which helped drive home loan rates lower in Flower Mound, Texas and everywhere.  Lower rates resulted from these purchases because of supply and demand.  When there is more demand, prices move higher and yields (interest rates), which move inversely to prices, move lower.

This time will be a bit different.  The Federal Reserve will be printing money and buying U.S. Treasuries. They have hinted they will be purchasing Treasuries the tune of a whopping $100B per month.  The Federal Reserve is expected to announce their new bond-buying program at their monetary-policy meeting on Nov. 2-3.  This 2nd round has been dubbed by the media as QE2.

Here’s the Difference
With the new program, the Federal Reserve might not purchase MBS at all and may, in fact, only purchase Treasuries.  Both Treasuries and MBS are bonds and compete for the same investment dollar. There is a natural spread between Treasuries and MBS.  If the yield of Treasuries goes down because the Federal Reserve is buying $4B to $5B in Treasuries per day, it would likely help MBS move down in yield (interest rates) and up in price as well to remain competitive.

There is also speculation swirling that MBS may get disappointed by QE2, like a jealous suitor, and sell off.  A sell off would mean price deterioration, resulting in higher yields (interest rates).

But how low can they go?
Assuming the market responds favorably and MBS improve, it is probably unlikely that rates will move significantly lower than they are today.  For lenders to be able to offer a mortgage rate at 3.75%, it would require significant trading by Wall Street investors in the 3.0% coupon.  This coupon has seen very little activity. That’s not to say it couldn’t happen…but it’s a big leap.

In addition, Lenders may not pass on the market improvements to the borrower.  Why is this?  Because there is no incentive to do so!

Lenders in Texas and across the country have been slammed with refinance volume and are running at, or over, capacity.  In addition, processes have slowed due to new government guidelines and lenders increased attention to compliance.  With processes moving slower, lenders are requiring longer lock periods which impact interest rate pricing.  In addition they may look to further manage capacity by regulating their volume thru the interest rate offered.

“Wait and See” is full of risk.  If the Fed does move forward with QE2, and if MBS improve, and if lenders pass on the mortgage interest rate improvements to the borrower, it is highly likely the benefit in interest rate will be incremental.  That’s a lot of “if’s” to hold onto for a hope of small gains.

The downside risk is far greater than the upside potential for gain.  If QE2 is not well received, the bond market would sell off and mortgage rates would suffer.  History shows us this can happen quickly.

As I mentioned in my post Homeowners Save With Refinance, the savings at today’s rate is substantial.  And the savings could help you make your way down the Road to Wealth.

With these incredibly low mortgage interest rates, there may not have ever been, nor ever be again, a better time in our history to purchase or refinance your home.  The waiting game could be risky and the opportunity may disappear.

Will Borrowers Lose? New Mortgage Rules Could Have Unintended Consequences

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Home equity loans are an attractive borrowing tool and can be used strategically to help people improve their financial picture.  Equity represents the difference between market value and your loan balance.  No matter where your property is located, the return on equity is always the same – zero. While the mortgage principal is reducing and your home is appreciating, there is a misconception that equity earns a rate of return.  However, it only grows as a result of the mortgage balance reducing and the home appreciating.

Many people elect to keep their “equity” in some form of an investment and maintain their home for housing purposes.  Some choose to leave it in a non-performing status – trapped in the walls of their home.   Yes, too many people pull it out and blow it on toys.  Then there are those that tap into their equity for home improvements, emergencies, or unanticipated situations.

That was the case with Mary.  Mary contacted our office for a mortgage consultation.  Recently divorced and now going thru the tough steps of property separation, she needed some cash.   In her settlement, she was awarded the home, however is required to pay $15,000 to her ex-husband.  After paying attorney fees she has depleted her savings …and it made sense to her to tap into the equity in her home, so she sought out professional advice.

Extracting home equity in Texas is a little different than other states.  A Texas Cash Out transaction (referred to as an Texas A6) has some unique cash out rules which are spelled out in SECTION 50(a)(6), ARTICLE XVI, Texas Constitution.  The first rule to hurdle is the new loan amount cannot exceed 80% of the current market value.  The 80% must pay off the existing mortgage balance and any proceeds remaining are cash back to you.  For Mary, this was no problem.  After all, she only owes $37,000 and has a market value of around $81,000.  She can obtain a new loan for $64,800.

The good news is Mary has great credit, a solid work history, and more than enough income to qualify.  As we reviewed the numbers, we discovered that even though we were extracting equity, adding closing costs, and extending her term, her monthly payment would be reduced by almost $300.  In addition, the total interest and repayment cost over the term was far cheaper than taking a signature loan for the $15,000 – plus it was all tax deductible interest.

Another rule for Texas A6 is the limit on closing costs -capped at 3% of the loan amount.  For smaller transactions this can be a challenge.  The reason is because most costs are a fixed price, not a percentage of the loan  (i.e. appraisal, underwriting, processing, escrow, attorney fees, etc).  On a $100,000 loan you are limited to $3,000 for closing costs and this can be tough to accomplish.  Drop lower than $100,000 and you are at wits end trying to figure out how to pull it off.

But wait, there is an option available….which is to have lender paid closing costs accomplished via a higher interest rate.

Mary’s loan is for $64,800 and the cap of 3% limits the closing costs to $1944, which does not cover everything.  And let’s face it  – all service providers have to get paid. Since lenders offer premium pricing (known as SRP or YSP), we were able to get past the bump in the road and structure her loan with a higher interest rate and have the fees over $1944 paid by the lender.  Even at the higher rate, Mary was reducing her monthly payment and able to get the needed funds to satisfy the requirements of her divorce settlement.

There are some new rules coming next year that could restrict these type of transactions.

Earlier this summer, Congress passed the Financial Reform Bill which includes Mortgage Reform – the Dodd Frank compensation bill.  This bill is 848 pages, single spaced – a lot to read and digest.  There is still broad based confusionno one really knows yet how to deal wit the bill and its prohibitions.   And of course it is subject to how each individual lender interprets the bill as well as how mortgage employers might restrict compensation.

Within this new bill, which is effective April, 2011, there are some rules which could have unintended consequences on transactions such as Mary’s.  Under the current interpretation, mortgage originators will have to set their compensation and cannot deviate – thus restricting the ability to negotiate, or even inflate to pay costs such as with Mary.  With this set compensation, if a borrower needs additional lender SRP over and above what the originator has set as his business model, tough luck…no cigar.

While Mary may have established trust over the long haul with her mortgage professional, she may be forced to search for another lender who has more profit margin built into their pre-set business model.  But will she find one?  Or will she end up having to find a different strategy to get her needed cash?

Are You On the Road to Wealth?

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“Money, Money, Money….” Regular folks are singing the ABBA tune at record numbers these days.  And the lyrics are quite fitting for the times we are facing:

“I work all night, I work all day,
to pay the bills I have to pay
Ain’t it sad
And still there never seems to be
a single penny left for me
That’s too bad
In my dreams I have a plan
If I got me a wealthy man”

But forget the “wealthy man” part, ladies.  All of us, women and men alike, need a wealthy plan!  And we are never, never, too old to get started.

Working hard won’t get you there.  A get-rich-quick scheme won’t get you there.  Paying off all your debt won’t get you there.

So what exactly is a wealth plan?  It is a plan that creates financial stability and security as it is defined by you.  It is a plan that allows you to sleep at night knowing that your family is taken care of should something happen to you.

It’s rather simple if you chunk it down into bite size pieces:

  1. Establish an emergency fund. Did you know that only about 27% of American’s have $1,000 set aside?  And another 27% only have between $1,000 and $5,000?  Most people are living paycheck to paycheck and would be in a tough spot if they had a major car repair or their hot water heat broke.
  2. Pay off high interest and non-tax deductible debt such as credit cards, furniture loans, department store cards, personal loans, and the like).
  3. Max out your contributions to retirement plans, regardless of how much your company matches…and even if they don’t.
  4. With all of the above being accomplished, build your cash reserves – this is 12 months of your fixed expenses….non-discretionary items such as mortgage, insurance, utilities, etc.
  5. Invest in a highly diversified portfolio that aligns with your growth goals and tolerance for risk.

If you still have a need for college planning for your children, it should be woven in as well.  Start a 529 plan as soon as possible!

Knowing how much you will need in retirement is important in setting your retirement goals.  Many reports suggest you will need 60% – 80% of your last years salary. If you plan to be active and plan to travel, you may want to consider 100% – 125% as your target.

Paying off your mortgage is something you consider after you have completed all the objectives above.  In the meantime, your mortgage is a valuable financial tool – use it wisely.

Just like a cross country road trip, you can’t get to where you want to go, without a map and a plan. Bottom line – write out a plan and get started!

Remember, “wherever you go, there you are.” Bukaroo Bonzai

How Will the New FHA Changes Affect You?

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FHA has been putting on fresh makeup in the form of new guidelines.  The most recent moves take effect on October 4th, and can have a big impact on your wallet.

The first of these is H.R. 5981 and the resulting Public Law 111-229, which gives FHA the authority to change the amount charged to borrowers for the Up Front Mortgage Insurance Premium (UFMIP) and Monthly Mortgage Insurance Premium (MIP) as a means to help insure FHA.  FHA has said this is going to save you money, however it begs the question…if it is going to help FHA raise money, how will it save the borrower money?

These changes are outlined in Mortgagee Letter 2010-28.  Click here to read Mortgagee Letter 2010-28 in its entirety.

Up Front Mortgage Insurance Premium (UFMIP) is a lump sum that is added to the base loan amount and it is being reduced.  The monthly Mortgage Insurance Premium (MIP) is added to the monthly mortgage payment and it is being increased.  The folks in Washington would like you to believe that this is really a good thing…and on the surface, it does look pretty.

However, if you remove the blush and lipstick, you’ll discover that maybe looks are deceiving.

Here is a quick run down of the highlights:    

  • UFMIP will be reduced to 1.00% (down from 2.25%)
  • Monthly MIP will go up to .90% (from .55%) for 30-yr max LTV loans.
  • Up to 95% LTV, 30-yr will be .85% (up from .50%)
  • IMPORTANT: 15-year loans, monthly MIP remains the SAME

These premiums are effective for purchases, refinances, and streamlines.

On the surface, it seems that if the up-front portion (which is a bigger chunk of change) becomes a smaller percentage, and the smaller piece (the monthly premium) is going up…then perhaps FHA has done you a favor Mr. Borrower.  Before you get too excited, let’s do the math on this to find the real answer…


*Payment is principal and interest only and does not include taxes and homeowners insurance.

Let’s compare.  While the current structure results in a higher loan amount, the total mortgage payment and cash out of pocket is lower.  Under the new structure, it may seem counterintuitive, but the lower loan amount and higher monthly results in more out of pocket, now and forever more.  Raising the monthly premium has a similar effect as raising the interest rate by 0.33%!

If you are considering purchasing a home with FHA financing, you may want to consider taking action prior to October 4, 2010.

You Decide!

Bernanke – Clear As Mud!

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Did Bernanke clear things up?  That is a good question!

This morning at the Jackson Hole Symposium, Bernanke said that the central bank would be “vigilant and proactive” on inflation and believes that deflation is not a big risk. But did he shed any light for investors?

Bernanke downplayed the concern of a double dip recession this morning, saying the economy will continue to expand…but at a slow pace for the remainder of 2010.  He went on to say that the pace of growth will pick up in 2011.

On inflation, Bernanke acknowledged it has dropped to a level slightly below what fellow FOMC members view as conducive to a healthy economy.

Some have suggested that the Fed is out of silver bullets to revive the economy.  Today, Bernanke spoke at length about the tools the Fed has to fight deflation and stated, “the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risk of using the tool.”

Those tools include more purchases of longer term Treasuries.  As Mortgage Backed Securities get repaid to the Fed, instead of cleaning up their balance sheet, they will purchase more longer term Treasuries.

Another tool in the kit he would consider is to modify the language to signal the Fed will keep rates close to zero for longer than what is currently priced in the markets.

There has been chatter that suggest the “extended period” language needs further clarification or definition.  Such as…triggers.  What criteria, what levels, what triggers would sound the bell for further action?  It is about as clear as mud.  Bernanke said the FOMC “has not agreed on specific criteria or triggers for further action.”

Did Bernanke provide clear insight? Still sounds a little cloudy to me and appears to be a disappointment to investors who were anticipating more clarity.

Federal Reserve Chairman Bernanke

Bottom Line:

  • Recovery is softer than expected.
  • Deflation not a big risk.
  • Inflation has declined to a level slightly lower than what the Fed sees as healthy.
  • The Fed still has bullets it can use.