A mortgage comes with many moving pieces and understanding them is the key getting a great deal. Unfortunately, studies show that few Americans have a firm grasp of how mortgages work — from mortgage types to mortgage fees.
In this back-to-basics interview on NBC’s The Today Show, you’ll learn some mortgage planning basics to help you get smarter with your next home loan in Cincinnati or anywhere else — purchase or refinance.
Some of the topics covered include:
The mortgage applicants for whom adjustable-rate mortgages are a better choice than fixed-rate mortgages
Why you should include “How Good Is This Lender?”-type questions in the rate shopping process
What a pre-approval letter is good for, and what it is not good for
There is also one of the most simple explanations of “discount points” ever offered on network television.
The video runs 4-and-a-half minutes. For first-time buyers and experienced ones, it’s worth a watch. You’ll pick up some tips to use on your next mortgage.
Mortgage rates across the state are near year-to-date lows, but locking them in this week may be difficult. As Memorial Day nears, and Wall Streeters get a head-start on the long weekends, trade volume in the mortgage bond markets will dip.
When bond volume drops, mortgage rates get jumpy. It’s a relationship based more on scarcity than actual market fundamentals.
It works like this:
Conforming and FHA mortgage rates are based on the “market price” of a mortgage-backed bond
Mortgage-backed bonds can’t be bought or sold without a buyer and a seller at a specific price
As Friday gets closer this week, and more and more Wall Street traders will leave for their “extended” 3-day weekend, and bond markets will be left with fewer and fewer participants. This will create a market situation in which it’s harder to match a buyer and seller at any given bond price, resulting in larger mortgage rate shifts than usual.
These jumps in rates are exaggerated during periods of economic uncertainty like these. What’s more, there’s a lot of economically-important data due for release this week. That, too, can put markets in hysterics.
If this were a “normal” week, mortgage rates would be volatile. The coming of Memorial Day is just adding to the mix.
Mortgage rates may rise in Cincinnati this week, or they may fall. Either way, if you have the opportunity to lock something favorable, consider doing it. Rates are low and likely won’t last.
Among the most challenging aspects of shopping for a mortgage is how rates change constantly. It’s hard to pin them down.
For example, in 2011, mortgage rates have expired every 3-and-a-half hours, on average. That’s fast.
There’s two main catalysts for changing mortgage rates.
The first can be grouped as ”scheduled events”; the planned release of market data which includes the Existing Home Sales report, or a scheduled government statement such as when the Federal Open Market Committee meets. When the outcomes of these event-types either exceed, or fall short, of Wall Street’s expectations, mortgage markets react.
Home buyers and rate shoppers in Cincinnati realize this as higher (or lower) mortgage rates.
Then there’s the other type of catalyst — the “unscheduled event”.
Unscheduled events take many forms and are often called “surprise developments”. The Federal Reserve’s plan to inject $750 billion into mortgage markets in 2009 was one such surprise. Most geopolitical events fall into this category, too.
Unscheduled events are often unsettling to Wall Street because investors don’t have specific contingency plans for them like they would if, say, this month’s jobs report comes back exceedingly strong. For example, investors didn’t expect North Korea to fire missiles over Japan in 2008, nor did they expect a volcano to erupt in Iceland last spring.
When unscheduled, unexpected events occur, the market’s first — and natural — reaction is to scramble to make sense of it. Mortgage rates get jostled as a result and can take days to settle back to normal.
We’re experiencing an “unexpected event” right now.
In response to Sunday’s evening’s presidential address, markets are now upended. The dollar is strengthening, oil prices are falling, and stock markets are rising. Each of these items are altering mortgage rates across Ohio.
Even today, markets remain unsettled.
Therefore, if you’re shopping for a mortgage rate, keep one eye on the news and the other on the rate-lock trigger. During periods of unexpected activity, mortgage rates can change quickly so be ready to shop, and be ready to lock.
Which is better — a fixed-rate mortgage or an adjustable-rate mortgage? It’s a common question among home buyers and refinancing households in Ohio.
The answer? It depends.
Fixed-rate mortgages give the certainty of a known, unchanging principal + interest payment for the life of the loan. This can help you with budget-setting and financial planning. Some homeowners say fixed-rate loans they offer “peace of mind”.
Adjustable-rate mortgages do not.
After a pre-determined, introductory number of years, the initial interest rate on the note — sometimes called a “teaser rate” — moves up or down, depending on the existing market conditions. It then adjust again every 6 or 12 months thereafter until the loan is paid in full.
ARMs can adjust higher or lower so they are necessarily unpredictable long-term. However, if you can be comfortable with uncertainty like that, you’re often rewarded with a very low initial interest rate — much lower than a comparable fixed rate loan, anyway.
Freddie Mac’s weekly mortgage survey highlights this point.
The interest rate gap between fixed-rate mortgages and adjustable-rate mortgages is growing. It peaked 2 weeks ago, but remains huge at 1.16 percentage points.
On a $200,000 home loan, this 1.16 FRM/ARM spread yields a monthly principal + interest payment difference of $136, or $8,160 over 5 years, the typical initial teaser rate period.
Savings like that can be compelling and may push you toward an adjustable rate loan.
You might also consider a 5-year ARM over a fixed-rate loan if any of these scenarios apply:
You’re buying a new home with the intent to sell it within 5 years
You’re currently financed with a 30-year fixed mortgage and have plans to sell the home within 5 years
You’re interested in low payments, and are comfortable with longer-term payment uncertainty
Furthermore, homeowners whose existing ARMs are due for adjustment might want to refinance into a brand new ARM, if only to push the teaser rate period farther into the future.
Before choosing ARM over fixed, though, make sure you speak with your loan officer about how adjustable rate mortgages work, and their near- and long-term risks. The payment savings may be tempting, but with an ARM, the payments are never permanent.
It’s a great time for Cincinnati buyers and homeowners to look at the 15-year fixed rate mortgage.
According to Freddie Mac’s weekly Primary Mortgage Market Survey, the relative “discount” of a 15-year fixed rate loan as compared to a comparable 30-year product is the largest in recorded history. The interest rate spread between the two benchmark products is now 0.77%, nearly double the recent, 5-year average of 0.44%.
Despite its lower rates, however, homeowners that opt for a 15-year fixed mortgage should be prepared for higher monthly payments. This is because the principal balance of a 15-year fixed is repaid in half as many years as with a 30-year amortizing product.
The payment increase is 41% higher at today’s rates. If you can manage that, though, you’ll reap dramatic interest payments savings over time. For each $100,000 borrowed at today’s market interest rates, your mortgage interest costs on a conforming 15-year term mortgage will be lower by $56,000 versus an identically-structured 30-year term. The more you borrow, the more you save.
That said, not everyone should use the 15-year product.
One reason you may want to avoid 15-year products is because the higher payments may lead to financial stress. Unless your monthly income far exceeds your monthly debts, choosing a 30-year product may feel safer for you.
Another reason is that, with less mortgage interest paid, 15-year mortgages don’t allow for as many mortgage interest tax deductions. This can have tax implications to you each year. Or, maybe you prefer to have your home leveraged, investing “spare dollars” in stocks and bonds.
These are all legitimate cases to stick with a 30-year term, but if you’ve ever explored the idea of using a 15-year fixed rate mortgage for your home, today, the math is in your favor. Talk to your loan officer before the rates start rising.
Over the last 7 days, conventional, 30-year fixed rate mortgage rates have jumped 24 basis points, or 0.24%, according to Freddie Mac’s weekly Primary Mortgage Market Survey.
It’s the largest 1-week spike in mortgage rates in recent history.
The 30-year fixed rate mortgage now averages 5.05% nationally. This is much, much higher than what we saw last November when mortgage rates were 4.17% and looked headed to the 3s.
That’s not the case today. In fact, it’s the opposite.
Mortgage rates have risen quickly and fiercely this year. As of this morning, mortgage rates are higher over 9 consecutive days, marking the longest mortgage rate losing streak in the last 6 years, at least.
Note, however, that when you call your loan officer or bank, you may not be quoted the same 5.05% rate as shown by Freddie Mac. This is because Freddie Mac-reported rates are national averages. Any given mortgage rate may be higher or lower depending on its region.
As an illustration, look how this week’s rates breaks down by area:
Northeast : 5.07 with 0.7 points
Southeast : 4.99 with 0.9 points
North Central : 5.09 with 0.6 points
Southeast : 5.06 with 0.6 points
West : 5.02 with 0.8 points
In other words, the rate-and-fee combination you’d be offered in your home town of Cincinnati is different from what you’d be offered if you lived somewhere else. In the Southeast, rates tend to be low and fees tend to be high; in the North Central U.S., it’s the opposite.
The good news is that, as a mortgage applicant, you can have your pricing whichever way you prefer. If getting the absolute lowest mortgage rate is what’s most important to you, have your loan officer structure your loan as in the “Southeast Style”. Or, if you prefer to have as few closing costs as possible and don’t mind slightly higher rates, ask for that type of set-up instead.
Either way, consider locking your rate as soon as possible. If rates keep rising, it won’t be long before they touch 6 percent.
Mortgage markets worsened for the 7th straight day Tuesday, equaling the longest losing streak of the last 5 years.
Conventional, 30-year fixed mortgage rates are now scratching 5 percent, with FHA mortgage rates running roughly the same.
This is a huge increase from just 11 weeks ago when mortgage rates were riding an 8-month-long hot streak, and appeared headed into the 3s. Then the Federal Reserve intervened.
On November 3, as additional support for markets, the Fed announced its second round of bond buys, a $600 billion program dubbed QEII — short for Quantitative Easing, Round II. Wall Street got spooked on the news; investors feared runaway inflation.
That’s when low rates ended. Here’s why:
(A) Inflation makes the U.S. dollar lose its value,
And, (B) U.S. mortgage bond payments are paid in U.S. dollars.
Therefore, (C) Inflation makes mortgage bond repayments lose their value.
When mortgage bond repayments are worth less, bond demand falls among the global investor set and that causes bond prices to fall along with it. When bond prices fall, mortgage rates rise and that’s exactly what we’re seeing right now.
Since the Fed’s QEII announcement, mortgage rates have soared and home affordability is taking a hit.
Given recent trends, it’s probably safe to declare the Refi Boom “officially over” and the era of low mortgage rates may be over, too. Home prices may move up or down in Cincinnati this year, but rising mortgage rates could render the point moot. If you’re looking for a great “deal” with low, long-term payments, the time to get in contract may be now.
Because of rising rates, homeowners have lost roughly 10% of their purchasing power since November.
Starting April 1, 2011, loan-level pricing adjustments are increasing. Most conforming mortgage applicants will face higher loan costs.
Loan-level pricing adjustments are mandatory closing costs. They’re assigned by Fannie Mae and Freddie Mac, and based on a loan’s specific risk to Wall Street investors.
First constructed in April 2009, loan-level pricing adjustment are a means to help Fannie Mae and Freddie Mac compensate for “riskier loans” by bolstering their respective balance sheets.
Since the initial roll-out, Fannie and Freddie have amended adjustments five times. The pending April adjustment will be the 6th revision in two years.
No class of conforming borrower is exempt from LLPAs. Each loan delivered to Fannie Mae is subject to a quarter-percent “Adverse Market Delivery Charge”. That cost is often absorbed by the lender.
The remaining adjustments are grouped by category:
Structure : Loans with subordinate financing may carry bigger adjustments
Equity : Loans will less than 25% equity carry bigger adjustments
LLPAs are cumulative. A borrower that triggers 4 different categories of risk must pay the costs associated with all four traits.
Loan-level pricing adjustments can be expensive — as much as 3 percent of your loan size in dollar terms. As an applicant, you can opt to pay these costs as a one-time cash payment at closing, or you can to pay them over time in the form of a higher mortgage rate.
The loan-level pricing adjustment schedule is public. You can research your personal scenario at the Fannie Mae website. However, you may find the charts confusing. Especially with respect to which route makes the most sense for you — paying the adjustments as cash, or paying them “in your mortgage rate”.
Since the Federal Reserve’s November 3 press release, in which our nation’s central banker committed $600 billion to bond markets, mortgage rates have leaped, moving quicker than the news can report them.
This week is a terrific example of that.
Today, newspaper headlines in Ohio and around the country read that mortgage rates rose 0.06% on average over the past 7 days, and that average loan fees remain unchanged at 0.8 points. The data is based on Freddie Mac’s Primary Mortgage Market Survey, a weekly poll of more than 100 lenders around the country.
Unfortunately for Cincinnati home buyers and other local rate shoppers, the Freddie Mac figures are low. Both mortgage rates and fees rose by more than what’s being reported.
Freddie Mac’s data is not real-time. It’s out of date for today’s pricing.
According to Freddie Mac, the survey’s methodology has it collecting rates from participating lenders between Monday and Wednesday, averaging the results, and then publishing that data Thursday late-morning. The problem there, as you know if you’ve shopped for a mortgage rate, is that mortgage rates change all day, every day.
Monday’s rates are unrelated to Wednesday’s rates, yet both are included and given equal weight by Freddie Mac. Some weeks, it’s not a problem; rates are relative static.
This week was not such a week.
Rates were jumpy Monday and Tuesday, rising and falling throughout the course of the day. Action like that is normal. But Wednesday, mortgage bonds put forth their third-worst daily showing of the year. Rates rose by as much as 3/8 percent between the market open and close, with the bulk of the sell-off coming late in the day. In other words, after the deadline of Freddie Mac’s survey.
Mortgage lenders accurately reported their rates to Freddie Mac, but they reported them before the market turn a turn for the worse.
The lesson is that mortgage rates are time-sensitive and can’t be captured by a weekly, average survey. When you need to know what mortgage rates are doing right now, the best place to check is with your loan officer. Otherwise, you may just get yesterday’s news.
Rock-bottom mortgage rates may be gone for good. This week’s Freddie Mac Primary Mortgage Market Survey shows in numbers what Ohio rate shoppers have learned the hard way — mortgage rates are spiking.
During the 7-day period ending November 18, the average 30-year, conforming fixed rate mortgage jumped to 4.39 percent, an increase of 0.22% from the week prior.
And it’s not just rates that are soaring. The average number of points charged to consumers increased to 0.9 percent last week. For most of the year, that cost had been 0.7 percent.
One “point” is equal to 1 percent of your loan size.
With the sudden rise in mortgage rates, we have to question whether the Refi Boom is ending. Between April and early-November, conforming mortgage rates dropped more than a full percentage point and, during that time, a lot of Cincinnati homeowners capitalized on the market. Refinance activity was strong; rates cut new lows each week.
Today, however, Wall Street sentiment is different. There’s a growing concern for the future of the U.S. dollar, and that’s making mortgage bonds less attractive to investors. As demand drops, so does the underlying bond’s price which, in turn, causes mortgage rates to rise.
Buy-sell patterns like this are common. The speed at which they’re changing is not. Mortgage lenders can barely keep up with the volatility, issuing up to 4 separate rate sheets in a day.
Therefore, if you’re shopping for mortgage rates, or wondering whether it’s finally time to join the Refi Boom, the time to lock is now. Mortgage rates should remain volatile through the New Year, at least. At what level they’ll be then, though, is anyone’s guess.
30-year fixed mortgage rates rose last week, marking the first time in a month that rates failed to fall week-to-week.
The data sources from Freddie Mac, one of the government’s major mortgage securitizers and a sister entity to Fannie Mae. Each week, Freddie Mac collects mortgage rate data from more than 120 lenders nationwide and publishes the results in a report called the Primary Mortgage Market Survey.
According to this week’s PMMS, the 30-year fixed rate rose 0.02% and now averages 4.21% nationally. The average accompanying cost is 0.8 points.
1 point is equal to 1 percent of the loan size.
Note, though, that these are just averages. Just as real estate markets are local, mortgage rates can be, too. As an illustration, look how this week’s rates break down by region:
Northeast : 4.22 with 0.8 points
Southeast : 4.30 with 0.8 points
N. Central : 4.19 with 0.8 points
Southeast : 4.23 with 0.7 points
West : 4.17 with 1.0 points
The rate-and-fee combination you’d get in your home state of Ohio , in other words, is different from the rate-and-fee combination you’d get if you lived somewhere else. In the West, rates are low and fees are high; in the Southeast, it’s the opposite.
The good news is that, as a rate shopper, you can have it whichever way you prefer. If getting the absolute lowest mortgage rate is worth the extra cost to you, have your loan officer structure to structure your loan as such. Or, if you prefer higher rates and lower costs, you can go that route, too.
Banks offer multiple mortgage set-ups to meet every type of budget and, with rates down 1.00% since April 8, there’s good cause to call your loan officer about a mortgage refinance. See what set-up will work best for you.
Want a lower mortgage rate on your upcoming Cincinnati home buy? Think about moving up the closing date.
The reason is rooted in “rate locks”, a bank’s guarantee to honor a specific mortgage rate for a specific, finite period of time. Rate locks allow home buyers to reserve mortgage rates today even though their respective closings may be scheduled as far as a year into the future.
A rate lock is a contract. No matter what the “current market rate” is at the time of closing, the bank will honor the terms of the original rate lock.
It would be like making an agreement to buy Microsoft stock at a specific price 60 days from now. No matter what the price, you already know what you’re paying for it.
In this sense, rate locks are predictions about the future and, meanwhile, as we all know, the future can be a challenge to forecast. Lenders know this, too, of course, so it’s easy to understand why longer rate locks tend to be more expensive than shorter ones.
The longer the rate lock, the more risk to the bank.
To compensate for this “time risk”, therefore, lenders typically step-up pricing for rate lock guarantees as lock period lengthen.
15-day rate lock : The best of all pricing
30-day rate lock : 1/8 percent extra cost versus the 15-day rate lock
45-day rate lock : 1/4 percent extra cost versus the 15-day rate lock
60-day rate lock : 3/8 percent extra cost versus the 15-day rate lock
One percent of “extra cost” is defined as one percent of the borrowed amount.
Now, this incremental price chart is just a rough guideline; exact spreads vary from lender-to-lender. Overall, however, it’s fairly close.
That’s why it’s important to manage your closing date vis-a-vis your mortgage rate. Closing in 30 days versus 31 can save you an eighth-percent in closing costs. Assuming a loan size of $200,000, that’s $2,500 saved.
So, when negotiating a closing date on a contract, keep in mind the math of mortgage rate locks. The shorter its length, the more money you might save.
Mortgage rates are low right now but pinning them down this week could be a challenge. As Labor Day Weekend nears and Wall Streeters take their head-start on the holiday, trading volume will fall, which will cause mortgage rates in Ohio to get jumpy.
As mortgage rates change, so does the long-term cost of owning a home. Every 1/8 percent adjustment changes a household budget.
Meanwhile, the relationship between “vacation days” and mortgage rate volatility is an interesting one; based more in scarcity than market fundamentals.
Rates tend to get volatile near holidays because of two inter-related facts:
Conforming mortgage rates are based on the price of mortgage-backed bonds
Mortgage-backed bonds can’t trade without a buyer and a seller at a specific price
So, as the week progresses and more traders leave for their respective “extended” 3-day weekends, there’s fewer buyers and sellers left on Wall Street to connect for a trade. As a result, mortgage bond prices move across larger gaps than on a “normal” day which, in turn, translates into faster, larger changes in rates.
This phenomenon can be exaggerated during periods of economic uncertainty — like what we’re in now — and, furthermore, there’s a bevy of important data set for release this week including the FOMC Minutes, inflation data, and August jobs figures.
In other words, rates would have been volatile without the vacation week. The presence of Labor Day just piles on.
Mortgage rates may rise this week, or they may fall. Either way, if you have a chance to lock something favorable and within your budget, consider doing it. Rates are at all-time lows and likely won’t last.
Another week, another new low for conforming mortgage rates. In fact, this week marks the 9th time in a row it’s happened.
Mortgage rates are (again) at their lowest levels in history.
The data comes from the Freddie Mac, a government group and major loan securitizer for the U.S. mortgage market. Freddie Mac’s weekly survey is among the most widely-cited reports on mortgage rates and is the data used in home affordability models, among other statistics.
The 30-year fixed rate is averaging 4.42% nationally with an accompanying cost of 0.7 points. 1 point is equal to 1 percent of the loan size. This week’s reported rate is lower by 0.02 percent from last week, and lower by 0.70 percent from one year ago.
On a region-by-region basis, though, “average” 30-year fixed mortgage rates are different.
Northeast : 4.44 with 0.6 points
Southeast : 4.44 with 0.8 points
N. Central : 4.42 with 0.4 points
Southeast : 4.46 with 0.5 points
West : 4.35 with 0.8 points
But this isn’t to say that mortgage pricing is better in, say, California as compared to Florida. Note that the West Region — with the lowest average rate — has the highest required points. This is because mortgage rates and mortgage fees move in opposite directions. The type of low-rate/high fee structure common in the West may be right for some home buyers and would-be refinancers, but may not be right for others.
What’s important to remember is that, as a rate-shopper in Ohio , it’s always your choice on how your loan is structured. Banks offer multiple set-ups — with or without points — to meet every applicant’s budget.
As mortgage rates continue to slide and touch new lows, it’s an excellent opportunity to see what your lender can do for you. Low rates won’t last forever.
Fixed mortgage rates are now down more than 1/2 percent from the start of the year, and 3/4 percent from just 1 year ago. The drop has dramatically improved home affordability for home buyers in Cincinnati while creating refinance opportunities for existing homeowners.
From a payment perspective, a conforming, 30-year fixed rate mortgage is now cheaper by $41.94 per month per $100,000 borrowed versus July 2009.
A homeowner with a $300,000 mortgage, therefore, is saving $45,295.20 over 30 years.
Low mortgage rates rarely last long and rates appear to have troughed. After a big downhill between April and July, they’re now flat. This could mean rates have finished falling, or that they’re gearing up for another drop lower. Either way, if you haven’t talked to your real estate agent about home affordability, or your loan officer about refinancing, it may be time to make that call.
If today’s market marks the end of low rates, rates are expected to rise quickly.
Among the most challenging aspects of shopping for a mortgage is how rates change constantly. It’s hard to pin them down.
Mortgage markets worsened for the 7th straight day Tuesday, equaling the longest losing streak of the last 5 years.
Starting April 1, 2011, loan-level pricing adjustments are increasing. Most conforming mortgage applicants will face 
Want a lower mortgage rate on your upcoming Cincinnati home buy? Think about moving up the closing date.
