When it comes to guessing the best time to lock in a mortgage interest rate, I’ve seen easier games on the carnival midway. Hitting everything just right so as to capitalize on the best rates and costs is not impossible, but it can be quite daunting in today’s volatile market.
Before the recent downturn in the real estate industry, the movement of mortgage rates was relatively easy to predict. But now the key indicators that once predicted the movement of mortgage interest rates are not as closely linked to the actual rates on any given day. Making it further difficult to predict, rates may fluctuate by 25 or 30 basis points in a few hours or a few days. Even the experts confess to having greater difficulty giving advance notice of rate movements.
Interest rates are usually locked for 30 to 45 days, depending on the time stipulated in the purchase contract. At the same time, rate locks are available for 60 and 90 days while some lenders offer locks up to 180 days. Borrowers can expect to pay a premium for longer lock periods, and these prices can very widely between lenders. Most lenders require that the loan be locked between 7 and 15 days before closing.
First, Find a Home. Most lenders require an address to lock a loan. This is one way the lender knows the borrower is serious about actually purchasing their financing. When the rate is locked, the lender is committing their money to you at that price. Once that amount of money is committed, they can’t use it to secure someone else’s financing. So, lenders take rate locks very seriously.
Second, Track the Time. The average purchase contract is written for 30 days. But if your situation is different, you need to make certain that your rate lock won’t expire before your scheduled closing date. In fact it’s a good idea to check with your lender the seven days prior to closing just to make sure your loan will close before the rate expires. If there is a question about this, request a rate extension.
Third, Bank the Benefit and Sever any Surprises. Most borrowers find a rate they can live with and lock it in. This way, they know what their monthly payment will be and can budget for it. Further, they simplify their home buying experience by limiting the number of distractions they have while waiting to close.
There are still some buyers who can’t resist the urge to “play the market” and they will choose not to lock their rate but instead “float” it hoping for a market improvement and a lower rate. What they hope for is a dramatically lower rate. In the best real life scenario what they actually receive is a slightly lower rate, perhaps as much as .125%. Unfortunately in many cases the rate actually increases by the same 1/8th of a percentage point. You win some, you lose some. This is why most borrowers choose to lock their rate instead of float.
Having said all of this, some lenders offer a “float down” option for their interest rates. This option (usually accompanied by a fee…of course) allows the borrower to re-lock at a lower rate, should rates drop by a specified amount during the time their loan is in processing.
Fourth, Follow the Fed. Earlier this year the Federal Reserve announced plans to buy up more than $1 Trillion in mortgage-backed securities. The reason this is so important is because interest rates on fixed-rate mortgages are determined by mortgage-backed securities that are traded on the bond market. When demand for these instruments goes up, fixed interest rates drop, and vice-versa. This promise by the Fed has helped keep rates lower throughout the last few months of the year.
It is not certain what the Fed will do after the first of the New Year. What could happen (emphasis on the could) is that the market for mortgage backed securities could shrink a bit driving down the demand and causing rates to rise.
Wednesday, December 30, 2009
Tuesday, December 22, 2009
HUD Provides Transparency and Clarity for Borrowers
January 1, 2010 is more than the first day of the second decade of the 21st century, it is also the day new guidelines from the Department of Housing and Urban Development (HUD) go into effect. And with these guidelines it is hoped a new day of increased transparency and improved clarity for borrowers seeking their best options for home financing.
Until now many of the fees charged by lenders, title companies and third party providers could undergo dramatic changes between the time the loan was originated and the time it closed. These changes could amount to hundreds of dollars in additional money being charged to the borrower. Some of these increases were unavoidable. In most cases not only were they avoidable, but one set of fees was quoted to get the business while the actual fees were withheld until closing.
In 2005 HUD held a series of roundtable discussions with industry representatives, trade associations and consumer groups to discuss the impacts of these practices. After two and one half years, HUD its proposed rule changes on March 14, 2008. Since then HUD has received over 12,000 public comments in response to these proposed rules.
The hope of HUD is that these new rules will help consumers shop for the loan that is best for their needs. HUD believes that shopping leads to greater competition and that increased competition leads to lower prices.
Because loan fees have been at the center of this controversy, HUD has attempted to simplify the shopping process for borrowers. By dividing all loan fees into three categories it is hoped that borrowers will be able to make more wise decisions when making their choice for home financing.
Category One: These Fees Cannot Increase at Settlement
The lenders origination charge – this is the up front cost the lender charges to provide their services. In the past, this fee has seen dramatic increases, sometimes based on the difficulty of processing the borrower’s file.
The credit or charge (points) for the specific interest rate after it is locked – many lenders have made it their practice to “float” the interest rate until pricing improves and the yield they make increases. This spread is called the yield spread, or YSP. If pricing is worse, the points charged for the “promised” rate have historically increased. Mortgage Brokers will no longer be able to pass on an increased fee but instead will be held accountable to own up to their own risk when floating an interest rate.
Just what is the YSP? - A bit of background is required for this explanation. Under the new ruling, HUD has determined that YSP is harmful to consumers and must be disclosed to borrowers. Further, HUD has mandated that the YSP be disclosed in the form of a credit to the borrower on the Good Faith Estimate of closing costs. In order to keep their YSP, mortgage brokers must now offset this credit by increasing their origination charge. In contrast, Mortgage Bankers are not required to disclose YSP, because they do not earn a yield spread.
Category Two: Charges that can increase up to 10% at settlement
Required services the lender selects – this can include appraisal, inspections and appraisal reviews.
Title services and lender’s title insurance if the lender selects the title company or borrower uses a company the lender identifies.
Owner’s title insurance if the borrower uses a company the lender identifies.
Required services that the borrower can shop for and if they use a company identified by the lender.
Government recorded charges.
Category Three: Charges that can change at settlement
Required services that the borrower can shop for as long as the company is not identified by the lender.
Title services and lender’s title insurance so long as the borrower does not use the company the lender has identified.
Owner’s title insurance (if the borrower does not use the company identified by the lender.
Initial deposit for the escrow account.
Daily interest charges.
Homeowner’s insurance.
There are other ingredients to these new rules and all are designed to protect the borrower from harmful or predatory lending practices. For the complete HUD booklet on this subject click here.
Until now many of the fees charged by lenders, title companies and third party providers could undergo dramatic changes between the time the loan was originated and the time it closed. These changes could amount to hundreds of dollars in additional money being charged to the borrower. Some of these increases were unavoidable. In most cases not only were they avoidable, but one set of fees was quoted to get the business while the actual fees were withheld until closing.
In 2005 HUD held a series of roundtable discussions with industry representatives, trade associations and consumer groups to discuss the impacts of these practices. After two and one half years, HUD its proposed rule changes on March 14, 2008. Since then HUD has received over 12,000 public comments in response to these proposed rules.
The hope of HUD is that these new rules will help consumers shop for the loan that is best for their needs. HUD believes that shopping leads to greater competition and that increased competition leads to lower prices.
Because loan fees have been at the center of this controversy, HUD has attempted to simplify the shopping process for borrowers. By dividing all loan fees into three categories it is hoped that borrowers will be able to make more wise decisions when making their choice for home financing.
Category One: These Fees Cannot Increase at Settlement
The lenders origination charge – this is the up front cost the lender charges to provide their services. In the past, this fee has seen dramatic increases, sometimes based on the difficulty of processing the borrower’s file.
The credit or charge (points) for the specific interest rate after it is locked – many lenders have made it their practice to “float” the interest rate until pricing improves and the yield they make increases. This spread is called the yield spread, or YSP. If pricing is worse, the points charged for the “promised” rate have historically increased. Mortgage Brokers will no longer be able to pass on an increased fee but instead will be held accountable to own up to their own risk when floating an interest rate.
Just what is the YSP? - A bit of background is required for this explanation. Under the new ruling, HUD has determined that YSP is harmful to consumers and must be disclosed to borrowers. Further, HUD has mandated that the YSP be disclosed in the form of a credit to the borrower on the Good Faith Estimate of closing costs. In order to keep their YSP, mortgage brokers must now offset this credit by increasing their origination charge. In contrast, Mortgage Bankers are not required to disclose YSP, because they do not earn a yield spread.
Category Two: Charges that can increase up to 10% at settlement
Required services the lender selects – this can include appraisal, inspections and appraisal reviews.
Title services and lender’s title insurance if the lender selects the title company or borrower uses a company the lender identifies.
Owner’s title insurance if the borrower uses a company the lender identifies.
Required services that the borrower can shop for and if they use a company identified by the lender.
Government recorded charges.
Category Three: Charges that can change at settlement
Required services that the borrower can shop for as long as the company is not identified by the lender.
Title services and lender’s title insurance so long as the borrower does not use the company the lender has identified.
Owner’s title insurance (if the borrower does not use the company identified by the lender.
Initial deposit for the escrow account.
Daily interest charges.
Homeowner’s insurance.
There are other ingredients to these new rules and all are designed to protect the borrower from harmful or predatory lending practices. For the complete HUD booklet on this subject click here.
Tuesday, November 24, 2009
A Father's Love
The book lay under several layers of long forgotten personal items in the trunk of her car. Its binding showed evidence of neglect, yet it protected the unread handwritten pages. For more than a year the bound pages remained a part the items hoarded by the girl as she tried desperately to hold tightly to her fast fading youth.
Her senior year of High School became a distant memory in the rush of the fall semester of her College sophomore year. She was growing up; at least in many areas of her life. The discipline of regular class schedules and deadlines for papers and projects was reshaping her priorities. Values change. So do priorities. And so do friends. The old things pass away so that new things can come. In many ways, the girl was becoming a young woman. But still the book still lay under the growing pile of discarded items in the young woman’s crypt of her past.
For 263 days of her High School senior year, he sat at the coffee shop table sipping a mixture of coffee, cream and sweetener. And every day the unlined pages of a black bound journal were slowly and thoughtfully filled with the love he poured out for his daughter. He was a father and he loved his girl. He provided for her needs. He protected her from the encroachments of the world as best he could. And now in the pages of this book, he wrote the words of his life experience, dipping each thought into the ink well of his heart. His hope was that somehow this labor of love would help preserve his precious girl.
“My dear daughter”, headlined the top of each page. What followed was a different story every day; a new insight into life. A sliver of wisdom, a drop of knowledge, a pinch of experience, a glimmer of insight.
“When Niagara Falls was first discovered the flow of water over the falls was much greater than it is today. Then the amount of water going over the falls caused considerable erosion moving the lip of the falls backward up to 3 feet per year. But man’s need for electricity led to the construction of several dams upstream from the falls so that water could be redirected through turbines creating electricity. Now the volume of water passing over the falls is greatly reduced and the erosion caused by the water has slowed to about 1 foot per year. The Niagara Falls are one of many natural wonders that display God’s handiwork. And so your life was created as a wonderful miracle whose purpose is to demonstrate the magnificence of God. Construction of man-made structures, no matter how noble, has interfered with the natural flow of God’s wonder at Niagara. The same will be true should you allow the trappings of this world to impede the display of God’s wonder in your life. Not only will these impede the flow of His life through yours, it will greatly reduce His plans to reshaping and direct the flow of your life. Choose wisely those things you build into your life.”
The girl came home from college one day and her dad decided to clean out her car. In the trunk he found the black bound journal. Retrieving it, he placed it on the bookshelf of his office. Within a few days she returned to college and the book was never mentioned.
Two years past. On another visit home, she was talking with her father in his office when she noticed the journal on his shelf. “There’s my book,” she said. “Where did you find it?”
“Beneath piles of things in the trunk of your car” was all he said.
“Can I have it back” she asked?
“Sure” and he handed her the book.
Another two years passed and the girl was preparing to enter Medical School. The father was so proud. His little girl was growing up to be a beautiful productive woman. And he loved her.
Six months ago his phone rang. “Hello?”
Only sobs on the other end of the line. He knew the sound of her crying. “Sweetheart, what’s the matter?” The only response was, “Daddy” followed by more sobs. In a moment she regained her composure.
“Are you alright?” It was his only thought.
“Daddy, I’ve been up all night reading the book you wrote for me. It’s the first time I’ve read it. You put so much work into writing it for me, and I never appreciated it until now.”
“Writing it wasn’t work to me; and I knew you would read it when the time was right.”
Silence for a long moment. Then a sniffle on the other end of the line.
“Daddy, I never knew how much I was loved. Thank you.”
Then they both cried.
Who has shown you how much you are loved? Take a moment this Thanksgiving to say two simple words to them. “Thank You”. Happy Thanksgiving to all!
Her senior year of High School became a distant memory in the rush of the fall semester of her College sophomore year. She was growing up; at least in many areas of her life. The discipline of regular class schedules and deadlines for papers and projects was reshaping her priorities. Values change. So do priorities. And so do friends. The old things pass away so that new things can come. In many ways, the girl was becoming a young woman. But still the book still lay under the growing pile of discarded items in the young woman’s crypt of her past.
For 263 days of her High School senior year, he sat at the coffee shop table sipping a mixture of coffee, cream and sweetener. And every day the unlined pages of a black bound journal were slowly and thoughtfully filled with the love he poured out for his daughter. He was a father and he loved his girl. He provided for her needs. He protected her from the encroachments of the world as best he could. And now in the pages of this book, he wrote the words of his life experience, dipping each thought into the ink well of his heart. His hope was that somehow this labor of love would help preserve his precious girl.
“My dear daughter”, headlined the top of each page. What followed was a different story every day; a new insight into life. A sliver of wisdom, a drop of knowledge, a pinch of experience, a glimmer of insight.
“When Niagara Falls was first discovered the flow of water over the falls was much greater than it is today. Then the amount of water going over the falls caused considerable erosion moving the lip of the falls backward up to 3 feet per year. But man’s need for electricity led to the construction of several dams upstream from the falls so that water could be redirected through turbines creating electricity. Now the volume of water passing over the falls is greatly reduced and the erosion caused by the water has slowed to about 1 foot per year. The Niagara Falls are one of many natural wonders that display God’s handiwork. And so your life was created as a wonderful miracle whose purpose is to demonstrate the magnificence of God. Construction of man-made structures, no matter how noble, has interfered with the natural flow of God’s wonder at Niagara. The same will be true should you allow the trappings of this world to impede the display of God’s wonder in your life. Not only will these impede the flow of His life through yours, it will greatly reduce His plans to reshaping and direct the flow of your life. Choose wisely those things you build into your life.”
The girl came home from college one day and her dad decided to clean out her car. In the trunk he found the black bound journal. Retrieving it, he placed it on the bookshelf of his office. Within a few days she returned to college and the book was never mentioned.
Two years past. On another visit home, she was talking with her father in his office when she noticed the journal on his shelf. “There’s my book,” she said. “Where did you find it?”
“Beneath piles of things in the trunk of your car” was all he said.
“Can I have it back” she asked?
“Sure” and he handed her the book.
Another two years passed and the girl was preparing to enter Medical School. The father was so proud. His little girl was growing up to be a beautiful productive woman. And he loved her.
Six months ago his phone rang. “Hello?”
Only sobs on the other end of the line. He knew the sound of her crying. “Sweetheart, what’s the matter?” The only response was, “Daddy” followed by more sobs. In a moment she regained her composure.
“Are you alright?” It was his only thought.
“Daddy, I’ve been up all night reading the book you wrote for me. It’s the first time I’ve read it. You put so much work into writing it for me, and I never appreciated it until now.”
“Writing it wasn’t work to me; and I knew you would read it when the time was right.”
Silence for a long moment. Then a sniffle on the other end of the line.
“Daddy, I never knew how much I was loved. Thank you.”
Then they both cried.
Who has shown you how much you are loved? Take a moment this Thanksgiving to say two simple words to them. “Thank You”. Happy Thanksgiving to all!
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