As we were talking about last week, we have an unprecedented spread between the 30 Year and 15 Year mortgages.  In the past week, the 30 [...]]]>

Freddie Mac’s Weekly Primary Mortgage Market Survey (PMMS) was released this morning. 

As we were talking about last week, we have an unprecedented spread between the 30 Year and 15 Year mortgages.  In the past week, the 30 Year held at 4.22%, the 15 Year ticked down 0.05% from 3.44% to 3.39%. 

We’re looking at a comparison at $200,000 on a $250,000 home.  We’re ignoring closing costs, fees and points as they shouldn’t vary betweent he two loans.  

Mortgage Payment

I understand, $438/month difference in payment is a doozy.  That’s a lot of extra payment for a first time home buyer.  BUT, let’s keep it in context.  These rates are pretty low.  Home prices are pretty low.  

That $200,000 loan is $1,200 on a 30 year fixed in a normal(ish) 6% market.  You’re going to pay less in rate and less on a home than 5 years ago. 

Total Mortgage Payments

A 30 year fixed on a $200,000 loan will want $353,000 from you over time.  The 15 year will want $255,000 over the life of the loan.  That entire difference is mortgage interest. 

Time Value of Money

The argument against the accelerated payment for a first time home buyer is valid.  Are you better served funding college funds, life insurance, or, perhaps most importantly, disability benefits?  Possibly.  

For the first time home buyers who are buying today, it probably makes more sense than ever to talk to a financial advisor.  This combination of low rates and low home prices creates some new options.  Does it make sense to use the low rates to increase your buying power?  Maybe.  Does it make sense to identify a lower-cost home and accelerate the equity prepayment as much as possible?  Maybe.  Can you find a happy medium of being able to fund your asset accounts and accelerate your mortgage, possibly with a 20 year?  Maybe. 

There are more maybe’s in today’s market than ever before, but they represent a unique opportunity for first time home buyer loan programs to not only provide inflation protected housing (unlike rent), but still have options to fund both accelerated debt reduction and still fund all of those longer-term asset accounts.  

After finding 50-year lows last week, mortgage rates ticked up .07% to 4.22% this [...]]]>
Freddie Mac’s PMMS survey for this week hit and the results are interesting. 

After finding 50-year lows last week, mortgage rates ticked up .07% to 4.22% this week for the 30-year.  

The 15-year saw a similar increase, up .08% to 3.44%.  

However, the 5/1 ARM actually dipped another .01%.  The spreads between the 30 Year and the 5/1 ARM reached a whopping 1.27%. 

At a sub-4.5% 30 Year Fixed, it is hard to look at the adjustable.  There is a very valid argument that, if you know you’ll be selling, a 5/1 ARM can be a less expensive way to finance a property.  There’s also a pretty solid argument that, if you know you’ll be selling in just a few years, this may be a risky time to buy a home. 

Let’s look at a different spread:  30 Year v. 15 Year Fixed.  This has averaged just under .5% difference over the past 6 years, about .6% difference over the past 2 years, and is now at a staggering  .87%. 

Buying a home is both about a budget and a long-term plan.  After many years of sketching out home affordability using 6% or 7% figures, the prospects of securing a 15 year fixed at 3.75% or 3.625% is ridiculous. 

If we’ve been using 6% to forecast the expense of a $200,000 loan with first time home buyers in the past, that’s always been about $1,200.  Today’s 3.625% 15 Year is about $1,440.   So what does $240 buy you? 

The cumulative interest over those loans is about $60,000 for the 15 year…drum roll….over $230,000 on the 30 year.  

While the 30 Year v. 5/1 ARM comparison is drawing all of the press, that depends a bit on your appetite for risk.  If you can swing the extra $240, the 15 Year is a very interesting option. 

Volatility everywhere and nary a leader in sight.  Not so fast, [...]]]> What an interesting couple of weeks.  After a massive rally just two weeks ago accounting for a 109 basis point (1.09 discount points), last week saw a sell-off of 97 basis points (.97 discount points).

Volatility everywhere and nary a leader in sight.  Not so fast, I think we can help guide you through this.

This Time Is Different

No, it’s not.  It never is.

Let’s use the past few weeks as an example.  Japan’s problems are continuing to mount, but the reality of it is that the market had priced in a total and complete nuclear meltdown.  While the situation may get worse, rates didn’t improve.  The reason was the market had already priced in something worse than the actual tragedy that is occurring.

Predicting mortgage rates isn’t about predicting whether the information will be positive or negative, it’s about predicting how the market will react and minimizing risk in deciding when to lock a mortgage rate.

Should I lock or float my interest rate?

This is one of the most common mortgage rate questions and it is important.  A .25% difference in mortgage rate is a $30/month difference from day 1 and a $4,900 by the end of the 10th year.

Rate lock decisions are about avoiding risk, not timing the market.

If you remove the geopolitical unrest across northern Africa and the Middle East, rates would be much higher right now.  There is an argument that says that the recovery will stall out, but there is zero doubt that there is and was a recovery in progress.   The issue is that the factors cited for why our recovery may stall, largely food and energy driven inflation zapping consumer spending, is a mess for interest rate predictions.

Rates want to go up when inflation rises, they want to go down when the economy stalls.  Rule #1 of mortgage rate predictions is that when two equal and opposite forces collide, the one that makes rates go up will win.

If for no other reason than Rule #1, it is probably better to begin planning to lock in your rate.   If you’re so clairvoyant than you can predict an S&P pullback, buy puts on that prediction and lock in today’s long-term low rates.

What about home purchases?

This is a mess.  We have a few items colliding.

The home sales figures for the past few months have been soft.  This is Lake Shore Drive in early February.  General rule, any storm that can shut down Lake Shore Drive will slow down real estate contracts.

So the real question then ties to whether home buyers quit buying forever and ever or if they pulled a PunxsutawneyPhil and just waited 6 weeks.  If so, these next set of reports should be significantly better.  More buyers, declining supply, and you get higher prices.

What if home prices drop?

In a way, who cares?  Compliments of the Census Bureau and Rent.com, we have a very scary time to be a renter.  There is absolutely nothing to prevent rent prices from skyrocketing.   Skyrocketing might actually be an understatement.

In terms of financial risk, skyrocketing rent is far more dangerous than my home dropping 2-3%.  I can choose if and when I realize the loss on my home.  The landlord chooses when the renter realizes rising rental costs.

Mortgage Rates – Week of March 28th

We have a decent amount of data this week.  January home values from Case-Shiller hit tomorrow as well as consumer confidence.   Friday is the jobs report so Wednesday will include the ADP figures.   We have manufacturing data on Thursday and Friday.  There is plenty of data to move the market.   Our bias moves from favoring floating to favoring locking for anything closing in the next 30 days.  If you haven’t started home shopping, tulips are breaking ground.   The best home negotiation opportunities go to those home buyers who are writing offers before that first petal starts falling off.

Libya and Japan continue to dominate headlines, but the issues in Bahrain and Yemen are rapidly closing in as most important.   In the spirit of [...]]]> Like the past few weeks, this week’s mortgage rates will be driven by things that are simply not very mortgage related.

Libya and Japan continue to dominate headlines, but the issues in Bahrain and Yemen are rapidly closing in as most important.   In the spirit of gross oversimplification of geopolitical events, let’s just call this collectively “the mess.”  This week is light on economic data, but it really doesn’t matter.  We’re going to continue to see volatile swings as money moves around in its typical bipolar quest for safety and high return.

Last week, mortgage rates extended their rally, with mortgage bonds bouncing up another 109 basis points.

We’re posting after the market closed on Monday so this is one of those cheatin’ weeks–we already have one day’s trading in hand so it should be a lot easier to forecast the week, right?

No.  Refer to “the mess” from above.  Your 401k probably had a really nice day yesterday and that’s usually not good for interest rates.  After last week’s rally of 109 basis points, we saw a 40 basis point sell off yesterday.    It’s going to be volatile and that might be an understatement.

In terms of data, we have GDP and consumer sentiment on Friday as well as a few other reports through the week.   Between here and there, there isn’t much on tap.

Today’s housing data had Existing Home Sales down 9.6% in January from 5.4 million homes to 4.88 million homes.  The big news was that the median sales price hit $156,100, the lowest since April 2002 and down 5% year over year.

Are home prices down 5%?  Not really.  A median is nothing more than the midpoint of all of the sales.  Well, 39% of the homes sold were distressed properties.  That moves the median rapidly.  That’s the highest level since April of 2009.   Distressed properties don’t reflect home prices.  People who were foreclosed on didn’t pay their mortgage.  They certainly weren’t dumping in the 1% of home value per year into ongoing maintenance like a “normal” homeowner would.

So if 39% of the homes required $5-10k in rehab to restore the home condition, was the median cost for the home $156,100 or should it include that $5-10k?  That bumps home prices to $161,100 or $166,100.  Should we celebrate the recovery of housing?  No.  Even with that adjustment, national housing stats are just national housing stats.

Mortgage rates are going to move .25% up and down during the next four days.  Which days?  I have no idea.  The long term trend is for higher rates, the short term trend is probably steady to possibly lower.  The overriding trend is that mortgages are getting more expensive next month.

Conforming loans get their new loan-level price adjustments.  FHA gets a new MIP factor.  If interest rates stay exactly flat, mortgage costs are going up next month.   If you are going to buy a home in 2011, odds are pretty good that today’s mortgage will be less expensive than the ones written later in the year.

On the most common choice of loan for first time home buyers is the 30 year fixed.  It’s been a great few days for buyers in terms of home affordability.

On the most common choice of loan for first time home buyers is the 30 year fixed.  Freddie Mac’s PMMS came out yesterday showing rates were at 4.88%, virtually unchanged from the week prior.

That’s good news.  We’re about 0.65% higher than the absolute lows of October, but we’re down almost .25% from the highs of a few weeks ago.  BUT, there’s better news.

Freddie’s survey released on Thursday is actually from results received Monday through Wednesday.  It doesn’t remotely track current mortgage rates.  It tracks mortgage rates from Monday through Wednesday.  That’s a really bad survey given the minor advancements in technology, such as the Internet, that have come about since they started tracking things this way.

Nonetheless, here’s what they missed:  The mortgage rate market rallied almost a full point in the past two trading sessions.  Put another way, if you were quoted a rate of x.xx% paying 1.00% discount points on Tuesday, you should be looking at that same rate with 0.00% discount points today.

That’s a huge swing, a nice boost to home affordability and perfect timing for first time home buyers hitting the streets during the early part of the spring market.