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Don’t chase rates — find the right mortgage too

A look at the various scenarios and what might work best for you

(AP) NEW YORK — For those who can qualify, it’s one of the best times to get a mortgage.

Last week, rates for 30-year fixed-rate loans dropped to 4.57 percent, the lowest level on records dating back to 1971, Freddie Mac said.

And for some who missed out on the government’s homebuying tax credit, the rates may more than make up for that lost $8,000.

“A tax credit is immediate gratification,” said Leonard Baron, a professor of finance at San Diego State University, “but long-term, with rates this low, you can get much more value.”

But which loan is right for you? The mortgage game has changed since the housing bust and more rules have been and are being added. One factor is for sure now: Your credit score should be at least 620 or you’ll have a hard time finding a loan. What varies is how much you have for a downpayment.

Buyer No. 1: You have a 20-percent downpayment and expect to retire in the house.

Take out a 30-year fixed-rate loan, the most popular type of mortgage. The interest rate stays the same over the life of the loan and right now, that rate is at historical lows.

“This loan is for someone interested in stability and security,” said John Stearns, mortgage banker at American Fidelity Mortgage Services Inc. in Mequon, Wisc.

Buyer No. 2: You have a 20-percent downpayment, but plan to move into another home down the road.

Consider a five-, seven- or 10-year adjustable-rate loan, which has a fixed rate for a set period and then adjusts higher after that time. These loans carry a lower initial interest rate than the 30-year fixed-rate, so you save money over the fixed-rate period. After the fixed-rate period ends, borrowers typically refinance into another loan to avoid the adjustable rate.

Rates on five-year adjustable-rate mortgages averaged 3.75 percent this week. That was the lowest on Freddie Mac’s records, which date back to January 2005.

ARMs got a bad rap during the housing bust because most people who took out two- or three-year ARMs got caught with an unaffordable payment when their rates reset. They couldn’t refinance into a fixed-rate loan because home prices had tanked and credit tightened up.

That risk still exists, but starting in September, lenders will have to evaluate whether borrowers can make payments after the rate reset on adjustable-rate loans backed by Fannie Mae.

Buyer No. 3: You have at least a 20-percent downpayment for a house worth more than $729,500.

You need a so-called jumbo loan which is not backed by Fannie Mae and Freddie Mac. That means any lender who makes a mortgage above that amount will have to keep the loan on its books.

To compensate for that risk, lenders charge higher interest rates than a conventional mortgage. The average rate for a 30-year fixed-rate jumbo loan fell to 5.48 percent this week, the lowest level ever in Bankrate.com’s survey.

Buyer No. 4: You have more than a 20-percent downpayment.

Depending on how much you’re putting down, you might consider a 20-year fixed-rate mortgage. Rates are sometimes, but not always, lower than a 30-year fixed-rate by about a quarter-point. However, because the loan term is shorter on the 20-year loan, the monthly payment will be higher than a 30-year mortgage.

For example, the monthly payment for a 20-year fixed-rate loan for $300,000 is $1,898. It’s only $1,565 a month if the loan is 30 years. But over the life of the loan, you’ll save about $108,000 in interest.

“Most people are interested in a lower monthly payment,” Stearns said.

Buyer No. 5: You have less than a 20-percent downpayment.

Consider a mortgage insured by the Federal Housing Administration, or FHA. A borrower needs to put down only 3.5 percent of the purchase price.

After the housing market slumped, the FHA became the major source of funding for first-time homebuyers. It insured about 24 percent of new loans in the first quarter, according to Inside Mortgage Finance, a trade publication.

Or, consider a mortgage loan that isn’t backed by the FHA, which only requires 5 percent down. However, you will pay mortgage insurance each month, which can add an extra $25 to $50 to your monthly payment depending on your credit score. Private mortgage insurance protects a lender against losses when a borrower defaults. If you have very good credit, this option may be cheaper.

Buyer No. 6: You have a gift downpayment.

While one in five first-time homebuyers used a gift from a relative or friend for a downpayment last year, there are some rules to navigate.

Gift money can be used for a downpayment on a conventional loan only after the borrowers use their own money to make the 5-percent minimum. Gift money can pay for closing costs or prepaid expenses like property taxes and insurance that are put into an escrow account. Banks typically check two months’ worth of bank statements for unusually odd deposits that could be considered gifts. However, if the gift was deposited six months before, a bank might not notice.

However, FHA mortgages allow borrowers to use a gift to make the 3.5-percent minimum downpayment. The gift must be documented in writing and the lender may ask for proof of deposit.

Buyer No. 7: You don’t have a downpayment.

Your options are limited.

If you are a veteran or the surviving spouse of one, consider a mortgage backed by the Department of Veteran Affairs. These loans offer 100 percent financing without private mortgage insurance at competitive mortgage rates.

If the home you’re buying is in a rural area as defined by the U.S. Department of Agriculture, you may qualify for a USDA home loan, which offers 100 percent financing without adding on private mortgage insurance. The USDA aims to help lower-income households get home loans at reasonable rates.

Source: Associated Press

Post: Shmuel Shayowitz, Approved Funding

Today Freddie Mac released their weekly survey report on mortgage interest rates. The official press release from their website is below, but here are the highlights as it relates to mortgage shoppers today:

• The survey in this report only encompasses rates from last Wednesday through this past Tuesday evening
  
• The rates being published are “national” and each region has a slightly different average, with the NorthEast being higher.
  
• The rates being published are with a fee of an average of .70% in points
  
• The rates are inaccurate for TODAY’s pricing as the MBS market has seen a sell off starting Wednesday, June 30th (See chart below)
  

Also very important to read our post regarding the Freddie Mac Weekly Survey >>CLICK<<

And don’t forget our resource centers to learn more:

Links: HomeBuyers  HomeOwners  RateWatch  LoanProducts

The report below by CNBC is an important identification about how the Unemployment numbers are now a very important contributing factor to economic indicators and market movement. We have been saying this for over 18months now, and it’s finally nice to see the media catch up J – Posted by: Shmuel Shayowitz

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CNBC Report: Unemployment Is No Longer A Lagging Indicator

Unemployment has shifted from a lagging indicator to a leading one and is warning government policymakers to confront problems in an economy mired in slow growth, Pimco co-CEO Mohamed El-Erian told CNBC. The consideration of unemployment as a lagging indicator is a favorite mantra among economists who believe the rate primarily looks at the past rather than what is to come.

But the internal details of current trends paint a different picture: More than half the labor force out of work for more than 26 weeks, the average length of unemployment at greater than 35 weeks, and the unemployment rate of 25.7 percent for 16- to 19-year olds.

“These are structural aspects which cannot be solved overnight, cannot be solved with a cyclical mindset,” El-Erian said. “And they are worrisome because they make the unemployment rate not only a lagging indicator but also a leading indicator.”

The US has been “an outlier” among nations who have been confronting the challenges posed by what Pimco, the world’s largest bond fund with more than $1 trillion in assets under management, calls the “new normal” of prolonged slow growth.

“Somehow in the US we are caught in this active inertia that results in just a cyclical response,” said El-Erian, the firm’s co-CEO. “We need more than that. We need cyclical and structural.”

He cited China, Brazil and Russia specifically as countries that have taken more proactive approaches to their problems. While other nations have looked at austerity and structural reform, the US is saying, ‘Hey, what we need is growth.’ What you need is harmonization that is about growth, is about austerity and critically is about structural reform.”

As for investors, El-Erian said stock prices are “getting toward fair value. We’re not quite there yet because I don’t think analysts quite understand what the new normal looks like in terms of lower growth and lower top-line revenue growth, but we’re getting there.”

He said the bond market, with the yield on the benchmark 10-year Treasury note yield below 3 percent, is close to fair value.

A double-dip recession, which has gathered more talk about economists, is a “risk scenario” but not what Pimco considers the most likely event, he said.

“We find it striking that consensus, which used to romance a ‘V’ (recovery) is now moving toward what we’ve been calling the new normal, and some people are going right through the new normal and romancing a double-dip and a depression,” El-Erian said. “What you’re seeing is a move in consensus that has repriced the bond market and is repricing the equity and credit markets.” CNBC.com Staff Writer By: Jeff Cox – Unemployment No Longer a Lagging Indicator: El-Erian

Mortgage Market Update – Wed July 7, 2010 – By Shmuel Shayowitz

Another busy trading morning despite the absence of fresh economic data…

• MBS clinging to a few BPS gain. Battling strong resistance levels (see my commentary below)
  
• Dow up almost 150 points
  
• S&P battles resistance at the 1,042 level.
  
• Dallas Fed President Fisher interviewed on CNBC about economy. Says big Co’s have money but are conserving it due to uncertainty with regulatory changes.  Along those lines – Ivan Seidenberg, CEO of Verizon and President of the Business Roundtable, was quoted as saying: “The President is anti-business, and has created an increasingly hostile environment for job creations.” {That doesn’t bode well for “consumer confidence” or “business confidence”}
  
• President Obama to give update on move to double exports in five years:
  
• MBA Mortgage applications jumped by 6.7% last week; with the depressed rates, the Refi index was up 9.2%;
  
  • Purchases were down 2%, at their second-lowest level since 1997. 
    
• Stocks seem to be shrugging off concern that earnings will disappoint for the past quarter {Will today’s positive stock gains reverse??}
  
• The futures market is pricing in a 78% chance that the Fed keeps rates at .25% through November 3rd, 2010.
  
• Ten Year yield opened at 2.93% (2.97% yesterday) and the 2-10 yield spread is at 232bps, dropping 2bps since yesterday morning.
  
  • The 2yr note is near record lows in yield. 
    
• Market: Asian stocks broadly declined Wednesday after weak U.S. data refueled worries about the strength of the global economic recovery.
  
• Market: China said it’s not considering dumping its U.S. debt holdings.  Says it has adopted a “go with the flow” attitude on managing its stockpile of foreign reserves. {I doubt that’s true, but that’s what they said!}
  

Commentary: As noted previously, Mortgage Backed Securities have been “overbought” for the past month and could/should see a sell off.  Keep in mind that our next level of support is way down @ 100.41 versus the 101.65 pricing we are seeing now. That’s a big drop! That can cause a quick MBS sell-off and have rates shoot up .25-.375% in a hurry. I also included 2 MBS candlestick charts that show the 3 month history as well as a 2yr history. It’s interesting to note that in November 2008 as the market was in panic mode and as the Fed rolled out their fancy Mortgage/Market/Treasury bailout programs we hit the same resistance levels that we are seeing now. It’s a tough nut to crack and I think barring another economic scare or an actual downturn, rates will start inching higher. Remember my comments from last week… “Improvements will be minor, corrections will be severe.”

Don’t forget to check out our Approved Funding Info Links:   HomeBuyers    HomeOwners   RateWatch   LoanProducts

Freddie Mac released their weekly survey stating the national average of 4.6% rate.

Most of the news media forget to mention 3 important points:

First, that the average they were quoting required about 3/4 of a point extra in fees for a buy-down to get that rate.

Second, the survey is broken down by region and the NorthEast was actually a drop higher than the national average.

Third, most if not all releases often omit important stats or caveats that get the rates to appear very low. Not all applicants can qualify for these rates. The rates are tied into specific loan-to-value and credit score benchmarks.

On average every 1/2 point (.50%) fee that a person pays extra to buy-down the rate will save them 1/8 (.125%) in the interest rate. So the real rate according to this is 4.75% with approximately a 1/4 point (.25%) extra in fee for that rate. [Note: A "point" represents 1% of the Loan Amount; ie $3,000 on a $300,000 mortgage]. 

Ever since the Government took over Fannie and Freddie, these weekly announcements by Freddie Mac are becoming more and more public media campaigns than anything else. 

What’s worse, is that many banks are not passing on the full benefit to mortgage bankers or brokers, because they are either at capital capacity and want to slow down business, or because they are building in a small “margin” to help offset their run-off of loans that they have on their books (portfolios) that they are losing to refinancing.

That said, at the end of the day — rates are definitely at historical levels!

Update: The Home Buyer Tax Credit Has NOT Been Extended… as of yet

The June 30 closing deadline has not been extended…but it was accepted as an amendment to the Tax Extenders Bill. Under the amendment, borrowers who signed purchase contracts by April 30 would be given three extra months to close their loan and still qualify for the homebuyer tax credit. The new deadline would be September 30, 2010.

Tax Credit Revisited – November 2009

When the tax credit was last modified in November 2009, Congress modified its language to read that, in order to be eligible, a homeowner must be under mutual contract for a home on or before April 30, 2010, and must be closed on said home on or before June 30, 2010. At that point in time they assumed 60 days between contract and close would be ample time to execute docs.

At this point in time it seems as though the 60 days is not adequate and Lenders, Realtors, Attorneys, Sellers and HomeBuyers are scrambling to do what they can to Close prior to the current deadline.

Fortunately, or unfortunately for some, a surge in April purchase activity created back-office back logs at the nation’s biggest banks and an estimated 180,000 home buyers are finding out the hard way that lenders don’t always clear conditions as quickly as you’d like.  The National Association of Realtors estimated that 1/3 (and maybe even half) of those contracts will not close in a timely manner.

Reminder: How A Tax Credit Extension Bill Becomes The Law

First things first — the tax credit date change is not its own bill. The extension proposal is tagged onto a broader bill of tax policy extensions and federal program renewals.  This means that the fate of the home buyer credit won’t be on the merit of the credit alone.

It also means that the bill may not become law in time for June 30, 2010.  The extension has passed the Senate but there’s still two steps to go (and loads of debate).

It takes more than a Senate passage to extend the home buyer tax credit.  It takes a vote in the House of Representatives plus a signature from the White House, too.  So far, we’re not there.

What If You Miss The June 30, 2010 Tax Credit Deadline?

Unfortunately, Some people will miss the deadline.  Technically, Congress could pass the law prior to June 30 and everyone will be fine, or it could pass the law after June 30 and make the credit retroactive for everyone that missed it.  Our expectation is that the law will pass in a timely manner, but if not, it will be retroactive thus protecting anyone who closes after the initial deadline, but before the extension. 

For those of you stuck in the middle of a contract, that are not getting  a timely response from your lender or broker, feel free to contact us if/when the Tax Credit is extended and we will expedite your loan for you so you are sure not to miss the final deadline.

As always – feel free to check out our site and sign up for the latest news and updates: http://approvedfunding.com/freereports.

 Mortgage Turmoil Video

Jobless Claims (Initial)

What Does Philadelphia Federal Index Mean?

This index is published by the Philadelphia Federal Reserve Bank on the third Thursday of the month at 10 am EST. It is considered to be a good gauge of general business conditions.

It is an index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction. The survey covers the Pennsylvania, New Jersey and Delaware region.

There are many regional manufacturing surveys or indices, and they tend to be ranked in order of timeliness and the importance of the region. The two most important are the Chicago PMI and the Philadelphia Fed Index, in that order. While the Chicago PMI has an impressive 91% positive correlation with the national ISM Index, the Philadelphia Fed Index has a decent 78% positive correlation with the national ISM Index. Several smaller surveys are then released before the Chicago purchasing managers’ report on the last day of each month. The purchasing managers’ reports are measured like the national ISM Index – 50% marks the breakeven line between an expanding and contracting manufacturing sector. However, for the Philadelphia Fed index, 0 is the breakeven mark.

These surveys can be of some help in forecasting the national ISM Index – particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.

POTENTIAL IMPACT ON INTEREST RATES: HIGH