Real Estate NewsFed Rate Hikes Don"t Preclude You From Shopping Around For Mortgages
Mortgage rates were relatively unchanged after the
Federal Reserve raised key interest rates earlier this week.
But even when rates do rise, you are never a total slave to what the Fed does
or doesn"t do.
"The wide range of rates and loans available from different sources means that
only a modicum of shopping can more than neutralize any overall market change,"
said Jack Guttentag, the Mortgage
Professor.
To keep inflation in check, the Federal Reserve raised rates on federal funds
used for overnight loans between banks from 5.25 percent to 5.5 percent. Likely
it"s last move this year, the Fed also increased the discount rate on direct
loans the Federal Reserve makes to banks from 4.75 percent to 5.0 percent.
"What the Fed did today wasn"t unexpected and the markets more concerned about
the tight jobs market and oil prices hitting a nine-year high. So the rate hike
is not so much a factor. The other concerns were pushing up rates only a small
amount today compared to prior Fed action," said Earl Peattie, president of Morro Bay-CA
based Mortgage News Co.
To make sure economic twitches and turns don"t cut into your bottom line when
you are shopping for a mortgage, examine your options.
Put more money down
"Those who can afford to do so should consider making larger down payments,"
said Eric Tyson co-author of "Mortgages
for Dummies" (IDG Books, $16.99).
"Unless you"re willing to be an aggressive investor with your excess cash and
you buy and hold good investments, you"re unlikely to earn a high enough return
from your investments after-tax to exceed the after-tax cost of mortgage money,"
he added.
Lock it in
A rate
lock can fasten down mortgages.
A rate lock guarantees you the rate you lock in and, at additional cost, it can
float you down to an even lower rate should rates fall during your lock-in
period. Falling mortgage rates were down to 7.67 percent last week, on 30-year
fixed rate conforming loans, according to Freddie Mac.
Get the lock in writing for a duration long enough to get you through escrow.
You don"t want it to expire before escrow closes, particularly if rates are then
on their way up.
Lock in as many of the costs as you can -- the points as well as the rate.
Set the lock "on application" rather than "on approval," otherwise you won"t
get a stab at rates until the loan application is approved. Rates are flat and
stable now, but approval could be weeks away and anything can happen by then.
Shop around for both the terms of the lock contract and its cost. Some lenders
may charge you an up-front, non-refundable fee should you withdraw your
application, if your credit is denied, or if for some other reason you don"t
close the loan. Others might charge the fee at settlement. The fee might be a
flat fee, a percentage of the mortgage amount, a fraction of a percentage point
or a higher interest rate. Some lenders offer the service at no cost.
Comparison shop for loans
Internet-based mortgage brokers have generated a windfall of mortgage discounts
from a quarter to a half percentage point by automating the loan process and
cutting out the traditional cost of the middleman.
Don"t limit shopping around to Web surfing, however. Examine rates from several
individual lenders" loans and and use a broker or two to sift through hundreds
of loans from dozens of lenders.
"Brokers generally offered us the best deals, and were better informed and more
attentive than bankers. Brokers only make money if they strike a deal for you,
while bankers get paid whether you close, or not," said Elizaville, NY-based
Marc Eisenson, co-author, along with Nancy Castleman and Gerri Detweiler of "Slash Your Debt" (Good
Advice Press, $10.95).
Also don"t forget to compare points, charged in addition to the interest rate
as a cost to borrow money. Each point is one percent of the loan.
"In exchange for paying no points up-front you assume a slightly higher
interest rate. Your monthly payments will be a little higher, but you just saved
literally thousands of dollars of up-front points," said Forrest Cambell,
president of the Silicon Valley (CA) Chapter of the California Association of
Mortgage Brokers.
Shop for cheaper terms
Last week, Fannie Mae reported the average fixed-rate on a 15-year mortgage had
slipped to 7.30, compared to 7.67 percent for a 30-year mortgage.
Short term loans" monthly costs are higher than longer term loans, but they can
save you hundreds of thousands of dollars over the shorter term.
For example, a 15-year conforming ($240,000) loan at Fannie Mae"s average rate
last week costs $2,197.65 a month in principal and interest, compared to only
$1,706.15 for the 30-year loan.
However, the 30-year loan term will sock you for $614,200.72 in 30 years,
compared to only $395,573.95 over the life of a 15-year loan.
Consider adjustable rates
Conversely, a 30-year adjustable rate loan gives you a cheaper monthly rate
than the 30-year fixed. Last week, Fannie Mae"s 1-year Treasury-indexed ARM
averaged 6.30 percent.
Using Fannie Mae"s averages on a $240,000 conforming loan, the ARM will cost
you only $1,485.54 a month compared to $1,706.15 for the fixed.
The less your total monthly financial obligations, the more the lender will
lend you and that could mean a larger, newer or otherwise more expensive home
than you could get with a fixed rate and its higher monthly payments.
Don"t forget, however, ARMs are only initially lower and adjustments are likely
to move the rate upward more in line with the fixed rate.
Be aware of the ARM"s adjustment limits or "caps" -- how high the rate can rise
during each adjustment period (often every six months to a year) as well as over
the life of the loan.
If the ARM costs adjust beyond your means you can refinance to a fixed rate
loan. If you plan to move before the ARM"s adjustments catch it up to fixed
rates, you may have less concern about caps and adjustment periods.
"There are also intermediate ARM loans, loans that are fixed for a period of
time, three, five, seven, 10 years and then turn into adjustables. These loans
are almost always lower by a 1/4 to 1/2 percent than conventional 30 year fixed
rate loans," said Cambell.
Look at automatic refinance loans
A growing number of lenders are also offering special mortgages that act like
an ARM in reverse.
Called "automatic
refinance mortgages" or "reverse-rate mortgages," the loans come with a
guarantee that your interest rate will drop by as much as 1.5 percentage points
below your starting rate -- even if market rates are higher at the time.
Designed primarily to give less creditworthy borrowers a chance to prove they
can make mortgage payments on time and over time, the loan comes with annual
interest rate decreases spread out over a couple of years. You must make all
payments on time, maintain a good credit standing and not fall below the income
level you listed on your loan application.
Just as an ARM is a cheaper rate than a fixed rate, reverse-rate mortgages
start off with a higher rate.
"If we have a product where the initial rate is the cap rate, and if rates can
only decline, then consumers will plainly want to consider this loan option,"
said "Our Broker" Peter Miller, author of
"The Common Sense Mortgage" (Contemporary Books, $16.95).
For more interest rate news, check out the Realty Times Interest Rate Watch