Let me start off by saying that I do not have anything against 30 year fixed loans.  They have [...]]]> When a consumer calls me for mortgage rates, 90% of the time they’re looking for a 30 year fixed mortgage.  I can almost guess immediately what mortgage the customer is going to ask for before they finish their sentence.

Let me start off by saying that I do not have anything against 30 year fixed loans.  They have a relatively low payment with little risk.  However, I truly believe there is a better loan out there.  It’s a loan that helps homeowners reach financial freedom faster.  If it were the standard, more homeowners would be debt free, house values couldn’t be inflated too easily and we likely would not be in the recession we’re in.  So, what is this magical loan that is so special?  So special that I risk being ridiculed by every industry expert for going against the grain?  Well, the answer is simpler than you may imagine…the 15 year fixed mortgage.

I’m going to share something with you that may make me sound like an oxymoron being that I’m a mortgage loan officer.  I want all of my clients to one day own their own house free of a loan.  I believe that owning your house free and clear of debt, along with being debt free as a whole, is the heart of financial freedom.

The average retiree on social security receives $1,000.  That’s $2,000 a month for a married couple.  Let me ask you something.  Could you live off of $2,000 a month?  If you said “No”, rethink your answer.  If you owed your house free and clear and didn’t have any debt, could you live off of $2,000 a month?  You probably could.  

We’ve all been programmed to think a 30 year loan is the holy grail of mortgages, but mortgages are just a fancy term for “loan.”  What else in life would you buy using a 30 year loan?  Would you take out a 30 student loan?  How about a 30 year car loan?  How about a 30 year loan on a boat (and I’m not talking a yacht)?  Of course not.  However, we’re happy to purchase a home and stretch out the payments as long as possible. 

15 year fixed mortgages save interest by having a lower rate than 30 year loans and by shortening the loan term.  How much does it save you?  More than you may think.

Let’s assume you’re offered a 5% 30 year loan and a 4.5% 15 year loan at $200k.  A $200k 5%-30 year loan has a total of $186,513 in interest charges.  A $200k 4.5% 15-year loan has a total of $75,397 in interest charges.  That’s a difference of over $111,000 in interest!  The 30 year has almost exactly 2.5 times more interest collected over the life of the loan.

So why don’t more consumers take a 15 year mortgage?  I’ve heard every reason under the sun as to why.  Here are the most common ones I hear:

• “I can’t afford the payments”
• “I don’t plan on living in this home forever”
• “I’ll make extra principal payments on my own”
• I can earn more money by investing rather than” putting it in my home’s equity”

Are these good reasons?  Sometimes yes, but usually not. 

It’s true that a 15 year loan does have a higher payment and that making extra principal payments does save money, but the reality is consumers usually pay what shows up on their statement.   Does it make sense to always get a 7 year car loan and pay extra in principal?  Sure it does, but we still usually opt for shorter loans.  Why?  Is it because we don’t want to pay for that car long after the value has decreased below the loan amount?  Is it because you don’t want to pay for that car forever?  Of couse this is why.  Yet somehow we’ve known this and have accepted shorter automobile loans but not with home loans.  Why?  I can tell you why, because we’ve been programmed to look for a 30 year loans. 

The reality is our home is often the most valuable thing we’ll ever own.  We are given the freedom to use that value in any way we want, so we use it by getting a long loan to keep the payments low.  No bank would ever give you a 30 year loan on a car because they know it would be worth virtually nothing by the end of the loan, but does that mean we shoud take a 30 year loan on a house just because it’s available?

Our fear of a high monthly budget drives us to shoot for a smaller payment.  Ask any used car salesperson and they’ll tell you it’s not about the trade-in value or sales price, it’s about getting the person a payment they’re comfortable with.  A sleezy salesman can use that tactic to get you into an overpriced car, but we’re using the same tactic on ourselves when we buy a home. 

We make adjustments to our lives to compensate for expenses.  Auto repairs, kids college tuition, medical bills or the unexpected addition to the family are all things we deal with, yet we find our way to adjust.  Start with a higher payment on your house and you’ll likely find a way to adjust when life throws you a financial curveball.

I know there’s at least one more group of homeowners who are still shaking their head.  They’re asking me, “What if I will never own this house free and clear because I know I’ll be moving before the loan is paid off.  How can you say a 15 year loan is still right for me?”  My answer, “Would you rather owe $5,000 on a 10,000 car when you trade it in or owe $10,000 on a $10,ooo car when you trade it in?”  Whether or not you pay it off is besides the point.  If you had a 15 year loan and sold your home before paying it off, you would owe much less on your home thus allowing you to put more money down on your next home.  Guess what else that does for you?  The larger down payment makes a 15 year loan on your new home affordable!  Now you’re 15 years away from owning your dream home free and clear instead of 30 years.  Suddenly the idea of going into retirement owning your home outright goes from a wish to a reality.

 I’m not here to tell you that you should immediately refinance your home or halt shopping for a home until you can afford a 15 year loan, but I do want you to consider this before you jump into a home loan you haven’t put much thought into.  Ultimately, it is your money and nobody is going to make that payment other than you, so you have to do what you’re comfortable with.  However, before you make your decision, ask yourself if you’re really comfortable throwing away that much money and delaying your financial freedom for another 15 years.  The higher payment may not sound that bad after all.

LINK TO INTERVIEW HERE

He felt that we won’t hit the floor for values until late 2010, but it varies by region.  He gave an example, showing that Boston had hit it’s floor in early 2009 and is already [...]]]> I just finished watching Spencer Rascoff’s interview on Bloomberg where he shared data with regard to mortgage rates and real estate values. 

LINK TO INTERVIEW HERE

He felt that we won’t hit the floor for values until late 2010, but it varies by region.  He gave an example, showing that Boston had hit it’s floor in early 2009 and is already rising.  This is an important factor for homeowners to consider when looking to buy or sell a home

Another point he makes, which I’ve been dreading for months, is rates will likely not stay as low as they are right now without another intervention from the Federal government.  Currently, inflation appears to be under control and the government is still purchasing mortgage backed securities.  This helps the price of mortgage backed securities stay high which keeps mortgage rates low.  However, the government’s current commitment to buying mortgage backed securities will end soon.  We also should expect many of the government funded programs to increase inflation.  As the price of mortgage backed securities drop and inflation kicks in, mortgage rates will start moving up.

Let’s do a review.  Rates are low, but are expected to go up soon.  Values are low and are expected to hit their rock bottom (nationally) in 2010.  This leads to the question of many first time home buyers, “When is the right time to buy?”

It’s hard to pinpoint the best time to buy a home, but it is easy to make a decision if you want to base your decision on facts alone. 

Here are some facts to consider:

• 30 year Fixed mortgage rates have stayed between 4.5%-5.25% for almost a year. 
• Home Values have continued to decline but recent signs show the value reductions are slowing
• First time home buyers have a $8,000 tax credit that is currently set to expire on December 1st of this year

Is there a chance that values will continue to drop?  Depending on the area, absolutely.  Can interest rates maintain these levels for a little longer?  Sure they can.  Will the government extend the first time home buyer tax credit?  Potentially, and maybe even likely. 

That said it’s hard to imagine that all three factors will continue to exist in perfect harmony as they do now.  Whether it is rates, values, or the tax credit; something will give eventually.  My guess is that rates will be the first thing to change.  In any event, every buyer must consider the consequences of sitting on the sidelines for too long.  Buying a house for 5% less in price next year at an interest rate 1% higher will raise the cost of home ownership considerably.

I can’t tell anybody when the right time for them is.  Personal, financial and professional factors are different for everyone.  One thing we know for certain -  there will be thousands, if not millions of Americans wishing they had made a different decision

What that ultimately means is if you can, you should start asking yourself “When?”

With weak economic data, signs of controlled inflation and talks of a new stimulus bill, investors have quietly moved more of their money in to Mortgage Backed Securities.

For the first time in over 3 weeks, [...]]]> The two consecutive weeks, we’ve watched mortgage rates slowly work their way down after a nasty spike in rates last month.

With weak economic data, signs of controlled inflation and talks of a new stimulus bill, investors have quietly moved more of their money in to Mortgage Backed Securities.

For the first time in over 3 weeks, a buyer can now secure a FHA 30 year fixed at 5% without paying buy-down points.  A conventional buyer can secure loans between 4.75%-4.875% with excellent credit and 20%+ down.

If you missed out on our last run of low interest rates, get your “Rate Lock Gun” loaded.

For the first time since “Black Wednesday,” I locked several 30 year fixed loans at 5% including some FHA with a slight buy-down.

Let’s hope rates continue to drop through next week.

ARTICLE LINK

At least we haven’t seen continued increases, if you want to focus on [...]]]> It’s pretty clear that investors do not have confidence of ANY position the bond markets take.  When rates are too high, investors buy the bonds because they think their cheap, but follow the activity with selling the second bond pricing starts to rally.

At least we haven’t seen continued increases, if you want to focus on the positive aspect.  Adjustable rate programs have also increased but marginally compared to the fixed loan rates.

It’s clear that bonds are unstable at the moment, but it does appear that Mortgage Backed Securities are starting to rally after 4 consecutive days of losses.  This is common because investors will find the point they consider [...]]]> One consistent trend of bonds, if not all markets, is when you see a quick reversal of trends. 

It’s clear that bonds are unstable at the moment, but it does appear that Mortgage Backed Securities are starting to rally after 4 consecutive days of losses.  This is common because investors will find the point they consider these securities as a bargain and begin purchasing them.

Mortgage Backed Securities opened up this morning only to give up all of their losses.  With 30 minutes left in trading, we’ve gained back all of those mid-day losses and have are up today.  If we can hold or continue this trend, rates will end today BETTER than yesterday. 

Remember that mortgage rates move in the opposite direction of the bond pricing.  When bonds increase in price, rates drop.

The hard part [...]]]> Last week I had predicted we may see a spike in interest rates.  Unfortunately, this became more true than I expected.  We’ve lost over 200 basis points on the Fannie Mae 4% coupon since the opening day Thursday.  We’re past any major news affecting rates and we’re currently just riding the trend wave. 

The hard part to predict now is where the trend will end.  With such dramatic movements, we could see pricing worsen more and more or investors may decide to start buying MBS’s at a discount at any moment causing pricing to dramatically rebound. 

Either way, expect to see 30 year fixed rates at their worst levels of the year.

Like I mentioned in an earlier post, the Fed is doing a good job keeping 30 year [...]]]> Over the last few weeks, we’ve seen 15 year fixed and adustable rate loans drop substantially.  15 year rates have dropped to the low 4% range and adjustable rate loans are now in the mid to high 3% range. 

Like I mentioned in an earlier post, the Fed is doing a good job keeping 30 year fixed rates in a range.  4.5% continues to be the bottom rate for 30 year fixed loans.  For the 5th time this year, rates came down to 4.5% and held.  This is proving to be a strong barrier to break.

The response I often give, which many of you have heard, is, “Forecasting interest rates is a little like forecasting the weather. If you want to know tomorrow’s forecast, it’s not too difficult. However, the farther out the forecast, the less likely it [...]]]> Many of my clients ask me my opinion of where rates are going.

The response I often give, which many of you have heard, is, “Forecasting interest rates is a little like forecasting the weather. If you want to know tomorrow’s forecast, it’s not too difficult. However, the farther out the forecast, the less likely it will be accurate.” Especially with how volatile the markets are today.

However, the government has added a level of stability to mortgage rates. There’s really only one thing that affects mortgage rates, and that’s the price of Mortgage Backed Securities (MBS for short). MBS’s are a bond that is sold as an investment. Rates are directly related to the price of these bonds. Rates move opposite to the price of these bonds, which means when the bonds are priced higher, rates are lower and vice versa.

Without getting into all of the details, the Federal Government has been purchasing these bonds since Fall of 2008, which is when mortgage rates first dropped below 5%. They allocated several billions of dollars to buy these bonds and have methodically purchased them over a period of time keeping rates betwteen 4.5%-5.125%.

This has been going on for over 6 months now. When the government’s initial purchases were almost finished, they announced they would be allocating more money to buy these securities, thus keeping rates in the same range.

What does all of this mean? Well, nobody can say for sure what their plan is, but it appears they are trying to keep rates in a certain range that stimulates refinancing and purchasing.

Here’s a question. At what interest rate do first time homebuyers get off the fence and decide to buy? 5.5%? 5%? 4.5%? How about homeowners who have been waiting to refinance?

From what I can gather from my own clients, anything in the 4-4.875% appears to get most people excited. I’m pretty sure the Federal Government has been watching mortgage applications and have noticed the increase we’ve had since rates have dropped.

Since they only have so much money to spend, it makes sense that they keep rates in a low range for a prolonged period of time. It doesn’t do much good if rates shoot down to 3% for 2 months then shoot back up. So, if they want people to buy and refinance, it makes sense to keep rates between the range where we saw applications increase dramatically, which is 4.5-5%.

I may not have a crystal ball, but my guess is 4.5% is about as low as we’re going to see on fixed rate 30 year loans. Even then, we’ve only seen rates get that low 4-5 times since they’ve dropped, which only lasts a day or two at a time.

So if you’re hoping for that 3.5% 30 year fixed, you may be waiting for a while. Does that mean it won’t happen? Absolutely not, but I wouldn’t count on it.

Just remember one last thing. Inflation affects rates. Many people believe a bad economy equals low rates. Ask anybody who took out a mortgage in 1981 how the economy was and what interest rates were then. Everything we’re doing now to fix the economy will become inflationary in the future. Even Warren Buffet said rates may go as high as they did in the late 70′s-early 80′s.

Here’s a link to the article where Warren Buffet talks about the economy and inflation…

Warren Buffet Article on MSNBC