Conventional
Loans
Any mortgage loan other than a VA or an FHA
loan. A conventional loan may be conforming
or non-conforming.
Government Loans
Loans purchased or guaranteed by government
organizations such as the Government National
Mortgage Association (GNMA or GinnieMae). Ginnie
Mae which is part of HUD helps increase the
supply of affordable housing by guaranteeing
securities issued by private lenders backed
by pools of residential mortgages insured by
three federal agencies -- the Federal Housing
Administration (FHA), the Department of Veterans
Affairs (VA) and the Rural Housing Service.
Conforming
Loans
A loan that conforms to the guidelines established
by Fannie Mae or Freddie Mac. These guidelines
establish the maximum loan amount, down payment,
borrower credit & income requirements, and
suitable properties. Lenders that make loans
established to these guidelines may sell those
loans to Fannie Mae or Freddie Mac. These lenders
may retain the servicing on these loans - so
that a borrower will continue to make payments
to the original lender. Conforming loans make
up the majority of loans in the U.S.
Conforming Loan Limits No. Of Units Contiguous
States, District of Columbia and Puerto Rico
Alaska, Hawaii & Virgin Islands
1 $307,000 $379,050
2 $384,900 $485,100
3 $465,200 $586,350
4 $578,150 $728,700
Non-conforming
Loans
A loan that does not conform to the guidelines
established by Fannie Mae or Freddie Mac is
called a non-conforming loan. A loan that is
larger than the conforming loan limit is called
a Jumbo loan. Loans that do not meet the credit
quality of conforming loans ('A' paper) are
called 'B','C' and 'D' paper loans. Second mortgage
loans - credit lines, home equity loans, home
improvement loans are also non-conforming loans.
Portfolio Loans
Loans may be sold on the secondary market to
Fannie Mae, Freddie Mac or a select number of
conduits (e.g. GE Capital) or they be kept in
the banks portfolio (e.g. American Savings Bank).
Portfolio loans may have more flexible qualifying
criteria, while saleable loans have to meet
an investors criteria.
Commercial
Loans
Loans programs discussed above are for 1-4 unit
residential properties. For 5+ unit residential
properties, office buildings, warehouses and
other commercial property refer to the 1st Commercial
Mortgage Directory.
Fixed Rate Loans
Fixed loans are generally amortized
over 15 or 30 years. The interest rate remains
fixed for the period of the loan. Fixed rates
are most popular when interest rates are below
9%. When rates get higher homebuyers are unable
to afford the higher payments required by fixed
loans and may prefer to get an adjustable loan.
A very popular program with first time homebuyers
is the 30-year fixed loan with a 2-1 buydown.
This loan has a lower rate for the first two
years. For example a 9% 30-year fixed loan with
a 2-1 buydown would have a 7% rate (9%-2%) for
the first year, 8% (9%-1%) for the second year,
and 9% thereafter.
Variable or
adjustable loans
are loans whose interest rate fluctuates over
the period of the loan.
TERMINOLOGY
Start rate (Teaser rate):
This is the starting interest rate of the variable.
It is often referred to as the teaser rate,
since it is lower than the fully indexed rate.
This is often done to induce people into the
loan since the start rate is low.
Adjustment Period :
This is the length of time for which the interest
rate is fixed. Therefore if the adjustment period
is six months, then the interest rate will remain
fixed for six months, after which time it will
adjust.
Adjustment Cap:
This is the maximum the interest rate can adjust
up or down each adjustment period.
Lifetime Cap:
The maximum interest rate over the life of the
loan.
Index:
This is the variable that the rate is calculated
from. This is normally a number that is published
in business newspapers. Well know indices include
:
Prime rate:
the rate offered to the bank's best customers.
Treasury bill rate: Short term debt instruments
used by the U.S. Government to finance their
debt. Commonly called T-bills they come in denominations
of 3 months, 6 months and 1 year.
Libor:
London Interbank Offered Rates. Average London
Eurodollar rates.
6 month CD rate the average rate that you get
when you invest in a 6 month CD.
11th District Cost of Funds:
Rate determined by averaging the cost of money
to banks that make the San Francisco 11th district
of the Federal Reserve.
Margin:
This is a fixed number added to the index to
compute the actual rate.
Conversion Options:
Some variable loans come with options to convert
them to a fixed loan based on a pre-determined
formula, during a given time period. For example
the 1-year tbill adjustable may be converted
to a fixed during the first five years on the
adjustment date. The means that you could convert
during the 13th, 25th, 37th, 49th and 61st months
of the loan.
Computing the mortgage rate:
The formula to calculate the new interest rate
is: new rate=index+margin
The new rate is also influenced by the adjustment
caps and the lifetime caps.
Examples:
If the old rate was 7%, and the new rate as
calculated by the formula is 9%, the actual
new rate will only be 8% if the adjustment cap
is 1%.
If the old rate was 7%, and the new rate as
calculated by the formula is 9%, but the lifetime
cap is 7.5%, then the new rate will be 7.5%.
Fully adjusted rate:
The fully adjusted rate is equal to the index
+ the margin. Example if the index is 5% and
the margin is 3% the fully indexed rate is 8%.
Negatively
Amortized Loans
There is not a clear understanding of the advantages
and disadvantages of negatively amortized loans
amongst consumers. A negatively amortized loan
is not good or bad in itself––that
depends on the consumers needs and preferences.
It is important to understand the advantages
and disadvantages of these loans––prior
to judging them.
Most negatively amortized loans are based on
the 11th district Cost of Funds Index (COFI).
This index is the average cost of money to the
San Francisco Federal Reserve, which is in the
11th district out of a total of 12 districts
in the U.S.
The money for most 11th district loans comes
from deposits made by customers. The Savings
& Loans which make the majority of these
loans like to match the interest rate on the
loan to the interest rate they have to pay to
their customers. So the loan interest rate is
computed as follows :
Note rate=COFI + margin
where the margin is a fixed number (typically
2%-3%) & represents the S&L's profit
margin. The interest rate on these loans have
an initial teaser rate of 3-6 months, after
which time the interest rate on these loans
adjust monthly. Most loans have a lifetime interest-rate
cap, which is the maximum the interest rate
can go to. The lifetime cap is the actual maximum
interest rate.
Some people have a misconception that the maximum
interest rate can go higher than the lifecap,
however this is not true.
The reason why the interest rate adjusts monthly
is because the interest rate on S&L's depositor
rates also adjust monthly. In addition, there
are no monthly or annual caps on the interest
rate. This is because there are no caps on the
checking, savings, CD & money market accounts
that the money is coming from. Even though there
are no interest-rate caps a quick look at the
history of the COFI will show that it normally
changes less than 2% in a year.
Because this loan has no interest caps, the
consumer protection agencies require the loan
to have payment caps––they require
that the minimum payment not increase more the
7.5% per year. So if the minimum payment in
the first year was $1,000 then the minimum payment
in the second year can be at most $1,075.
Since the minimum payment has caps and the
interest rate has no caps, this can cause the
loan to become negative––i.e. if
the interest rate increases and the minimum
payment does not increase sufficiently then
the payment does not cover the interest payment
causing the loan balance to increase. However,
the customer can always pay a fully amortizing
payment based on the current interest rate to
keep the loan non-negative. This fully amortizing
payment is exactly the same payment that would
be made in the case of a non-negative loan at
the same interest rate.
Example : 11 the district adj.
Start rate = 3.95% for 3 months.
Margin = 2.5%, Lifecap = 10.95.
Current COFI value = 3.7%. (mid 1994 - value
in mid 1995 is 5.1%)
Loan amount = $200,000
Start payment@ 3.95% = $949.55.
In the fourth month the interest rate becomes
6.2% (3.7% + 2.5%) and
the payment should be $1225.55. However, the
minimum payment remains at
$949.55 & you may pay only $949.55. This
payment is so low that is does
not cover the interest payment & thus causes
the principal balance to increase.
In the second year the minimum payment is 949.55
* 1.075 = $1020.77.
In summary
The main disadvantage of a negatively amortized
loan is that you can lose equity in your property
if you make the minimum payment. Also, the interest
rate adjusts monthly so that if rates do increase,
your rate would change immediately. This loan
can be a bad choice if you want to build equity
in your property but do not have the discipline
to make more than the minimum payment.
The advantages of this type of loan are: low
payments, payment flexibility––i.e.
make high or low payments depending on your
needs and easier qualifying. Loans are more
flexible since they are made by S&Ls. This
loan can be good choice for first time homebuyers
buying more they can afford and for self-employed
borrowers whose incomes may vary month to month.
It also be a good loan for rental properties
because the payment flexibility can be used
to avoid negative cash flow.
Hybrid
Loans
30/5 Balloon with conversion option.
5-year fixed followed by a 25 year fixed.
This is a 30-year loan except that the interest
is only fixed for the first 5 years. After 5
years, the entire principal is due. There is
typically an option to convert to a 25-year
fixed rate based on market pricing at the time
the balloon becomes due. There might be a minimal
processing fee (typically $250) to obtain the
new loan. The conversion rate is normally the
FNMA 60-day rate + 0.5%. The conversion option
may also be conditional upon :
Satisfactory mortgage-payment history.
The borrowers must still be the owner-occupants.
Secondary financing may not be allowed.
This loan is also known as the 5/25, or 30-yr
due in 5.
30/7 Balloon with conversion option
Same as above replace 5 yrs with 7 yrs, and
25 yrs with 23 yrs.
30/5/1 ARM. 5 yr fixed followed
by a 1-year adjustable for 25 yrs.
This is a 30-year loan except that the interest
is only fixed for the first 5 years After 5
years the loans becomes an adjustable. These
loans typically do not have a balloon provision.
30/7/1 ARM. 7 yr fixed followed
by a 1-year adjustable for 23 yrs.
30/10/1 ARM.10 yr fixed followed
by a 1-year adjustable for 20 yrs.
VA
Loans
The U.S. Department of Veterans Affairs guarantees
mortgage loans for veterans and service persons.
The guaranty allows veterans to obtain home
loans with favorable loan terms, usually without
a down payment. VA loans are available.
The U.S. Department of Veterans Affairs does
not make loans, it guarantees loans made by
lenders. To obtain a VA loan you may locate
a lender using Mortgage-Net. Lenders will normally
require a Certificate of Eligibility before
they can process a VA loan. This may be obtained
by sending the form DD-214 to the local VA office
along with VA form 1880.
Lenders offer 30-year fixed, 15-year fixed
and 30-year adjustable loans under the VA program.
The VA loan limit for 1996 is $207,000. The
most attractive feature of a VA loan is that
no down payment is required. In addition, it
is easier to qualify for a VA loan than a conventional
loan. This is because the loans is guaranteed
by the U.S. Department of Veterans Affairs.
FHA
Loans
An FHA loan is a mortgage loan insured by the
Federal Housing Authority which is part of the
U.S. Department of Housing and Urban Development
(HUD).
FHA loans used to have lower down-payment requirements
and were easier to qualify for than conventional
loans. In recent years, however Fannie Mae or
Freddie Mac have introduced low down-payment
programs like the Community Home Buyer program.
FHA loan limits vary geographically.
Besides the 30-year fixed and adjustable loans,
FHA has some very unique programs such the 203K
loan (for rehabilitation of run-down properties)
and theTitle 1 loan (for home improvement) which
requires no equity.
Shopping for a Mortgage
Key Players (Who's
Who)
Originator
The company that takes your loan application
and works with you to close the deal. This company
could be a retail lender or a mortgage broker.
Retail Lender
A retail lender has loan officers who take your
application, processors who process the application,
and underwriters who approve or decline your
loan. A retail lender could be a bank, savings
and loan, or a mortgage banker.
Mortgage Broker
A mortgage broker typically processes your application
and sends it to one or more wholesale lenders
for final approval. Wholesale lenders have underwriters
who approve/decline your loan. A mortgage broker
has access to a variety of wholesale lenders
and often offers the most choice in loan programs.
Wholesale Lender
A wholesale lender only works with mortgage
brokers. They take completed loan packages and
underwrite them. They offer mortgage brokers
discounted pricing in return for the upfront
work done by the mortgage broker. Some companies
may have both a retail and a wholesale division.
Investor
Lenders may keep your loan in their portfolio
or they may sell your loan after the close of
the transaction to an investor. If lenders portfolio
the loan, they only have to follow internal
guidelines to approve your loan, and so are
the final decision-makers. If lenders sell your
loan, then they also have to the meet the investors
guidelines to approve your loan. In this case
they may have to obtain investor approval. Portfolio
lenders tend to be more flexible but they generally
have higher rates. Some of the largest investors
in the country are Fannie Mae and Freddie Mac.
Servicer
The servicer of your loan collects monthly payments
from you. When a lender sells your loan to an
investor they may or may not sell the servicing
on the loan. Therefore if you obtain a mortgage
from a lender, and if that lender sells the
loan to Fannie Mae, the lender may retain the
right to service your loan and collect your
monthly payments. The sale of the loan does
not affect you in any way. The lender could
also choose to sell the servicing on your loan,
in which case you would have to make payments
to a different servicer.
Sources
for Obtaining a Mortgage
Mortgage Brokers Direct Lenders
Please be advised that no one source is
always better than the other. Every company
is different and individual borrowers have differing
needs and preferences. There is never any substitute
for shopping around, checking references and
meeting loan officers face-to-face.
Mortgage Brokers: Mortgage
brokers have increased market share and now
are the single largest source for mortgage loans.
A mortgage broker obtains financing through
the wholesale department of a lender.
Because mortgage brokers can represent many
different lenders they often have the most choice
in loan programs. It normally does not cost
you more to use a broker. This is because lenders
offer wholesale prices to brokers. Mortgage
Brokers then mark up the price and quote retail
prices.
Because mortgage brokers have a wide range
of programs they can often find the best program
to fit your needs. Many mortgage brokers are
small entrepreneurial firms that are flexible
and willing to work with your demands and schedules.
The key is finding a GOOD mortgage broker.
There is little consistency between mortgage
broker firms. The difference in rates, programs
and service between mortgage brokers can be
dramatic. The best way to locate and identify
a GOOD mortgage broker is:
Ask if they are a member of NAMB (National
Assoc. of Mortgage Brokers).
Ask for references. Check with the Better Business
Bureau or your local chamber of commerce.
Ask your friends if have done business with
mortgage brokers they are happy with.
Find out which mortgage brokers publish or advertise
their rates daily. This way you can monitor
their rates.
Use mortgage brokers on the Internet!! Support
electronic commerce and do business with companies
on the 'Net. Let's build that highway together!
Direct Lenders: originate,
fund and service your loan. Direct lenders are
generally larger organizations than mortgage
brokers and better capitalized. Direct lenders
have fewer programs than mortgage brokers but
may have more knowledge of the details of their
programs. The loan officer at a direct lender
generally has better access to underwriters
(the people who approve loans) than a mortgage
broker. This may sometimes mean faster approvals.
Direct lenders may be:
Mortgage Bankers
Specialize in originating and servicing loans.
They generally sell their loans to investors
like Fannie Mae and Freddie Mac. Their underwriting
guidelines (rules to make loan decisions) are
supplied to them by their investors. Mortgage
bankers may interpret these guidelines based
on their own lending philosophy.
Banks
Offer a wide range of financial services including
mortgages. They generally offer a few select
mortgage programs. Banks may keep loans in their
portfolio or sell their loans. Banks may also
work with other mortgage bankers to originate
their loans.
Savings and Loans
Generally offer portfolio-adjustable loans which
are easier to qualify for than most other loans.
Many S&Ls offer reduced documentation loans
that are ideal for self-employed borrowers.
Many S&Ls have started offering fixed loans
that are sold to Fannie Mae or Freddie Mac like
mortgage bankers.
Finance Companies
Generally specialize in B and C paper loans
for poor-credit borrowers, as well as 2nd mortgages.
They generally raise money by selling bonds
or commercial paper on Wall Street.
Private Investors
Like to earn high returns––so they
typically invest in riskier loans that banks
do not want to touch. Most of these loans are
based on equity alone.
Why
use a Mortgage Broker?
Mortgage brokers represent you––the
borrower––in obtaining financing
from a variety of lending sources. If mortgage
brokers are middlemen between you and the lender,
how can they save you money? Don't you have
to pay extra for using a mortgage broker?
Independent surveys have shown that mortgage
brokers do NOT cost you more than direct lenders.
In many cases they even save you money. Mortgage
brokers increase competiton in the market place,
resulting in lower rates for everyone. Since
mortgage brokers obtain their funds from a variety
of sources, they allow you to access to a large
number of lenders. When you apply for a loan
with a mortgage broker, you are effectively
applying for loans with all the lenders that
mortgage broker is approved with.
Mortgage brokers obtain rates at wholesale,
mark up these rates by adding points and then
quote you a retail rate. Mortgage brokers are
NOT employees of the lender, rather they are
independent contractors. Mortgage brokers are
free to set their own pricing. Therefore two
different mortgage brokers using the same lender
can quote you different rates/points! This is
because the two brokers may mark up wholesale
rates differently.
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Why do lenders use mortgage brokers?
Saves them time and money. The mortgage broker
does all the legwork of finding customers, pre-qualifying
them and putting together their loan package.
As a result, lenders are able to offer discounted
pricing to mortgage brokers.
Alternative to branch offices. Since personal
contact with the customer is usually required,
a mortgage broker serves as a lender's branch
office. This saves the lender tremendous amounts
of time and money. Through a network of mortgage
brokers, lenders can service a wide number of
customers.
Provide a matching service. Mortgage brokers
know what each lender is looking for and submit
loans that a particular lender is likely to
approve. This saves the lender a lot of time
and expense since they approve a higher percentage
of loans.
Mortgage brokers generate about 50% of all loans.
Lenders have established wholesale divisions
and have account representativeson staff just
to service their mortgage brokers. There is
a lot of competition amongst wholesale lenders
to get broker-generated business.
Save sales and marketing expense. Mortgage brokers
are responsible for all the sales and marketing
required to find clients. Lenders in effect
have a large sales force with little overhead
cost.
How do Rate Locks Work?
You cannot close a mortgage loan without locking
in an interest rate.
There are four components to a rate
lock:
1.)Loan program.
2.)Interest rate.
3.)Points.
4.)Length of the lock.
The longer the length of the lock, the higher
the points or the interest rate. This is because
the longer the lock the greater the risk for
the lender offering that lock.
Let's say you lock in a 30-year fixed loan
at 8% for 2 points for 15 days on March 2. This
lock will expire on March 17 (if March 17 is
a holiday then the lock is typically extended
to the first working day after the 17th). The
lender must disburse funds by March 17th, otherwise
your rate lock expires, and your original rate
lock committment is invalid.
The same lock might cost 2.25 points for a
30-day lock, 2.5 points for a 60-day lock. If
you need a longer lock and do not want to pay
the higher points, you may instead pay a higher
rate.
After a lock expires most lenders will let
you re-lock at the higher of the original price
and the originally locked price. In most cases
you will not get a lower rate if rates drop.
Lenders can lose money if your lock expires.
This is because they are taking a risk by letting
you lock in advance. If rates move higher, they
are forced to give you the original rate at
which you locked. Lenders often protect themselves
against rate fluctuations by hedging.
Some lenders do offer free float-downs (i.e.
you may lock the rate initially and if the rates
drop while your loan is in process, you will
get the better rate). However, there is no free
lunch––the free float-down is costly
for the lender and you pay for this option indirectly,
because the lender has to build the price of
this option into the rate.
What do you do if the rates drop after
you lock?
Most lenders will not budge unless the rates
drop substanially (3/8% or more). This is because
it is expensive for them to lock in interest
rates. If lenders let the borrowers improve
their rate everytime the rates improved, they
spend a lot of time relocking interest rates,
since rates fluctuate daily. Also, they would
have to build this option into their rates and
borrowers would wind up paying a higher rate.
Lock and Shop programs.
Most lenders will let you lock in an interest
rate only on a specific property. If you are
shopping for a house, some lenders offer a lock-and-shop
program that lets you lock in a rate before
you find the house. This program is very useful
when rates are rising.
New construction rate locks.
Most lenders offer long-term locks for new construction.
These locks do cost more and may require an
up-front deposit. For example, a lender might
offer a 180-day lock for 1 point over the cost
of a 30-day lock, with 0.5 points being paid
up-front, as a non-refundable deposit. Most
long-term new construction locks do offer a
float-down (i.e. if rates drop prior to closing
you get the better rate).
Zero-Point/Zero-Fee
Loans
Whatever happened to the conventional wisdom
of waiting for the rates to drop 2% before refinancing?
You have a 30-year fixed loan at 8.5%. A loan
officer calls you up and says they can refinance
you to a rate of 8.0% with no points and no
fees whatsoever.
What a dream come true! No appraisal fees,
no title fees and not even any junk fees! Is
this a deal too good to pass up? How can a bank
and broker do this? Doesn't someone have to
pay? Whose money is being used to pay these
closing costs?
No––this is not a scam. Thousands
of homeowners have refinanced using a zero-point/zero-fee
loan. Some refinanced multiple times riding
rates all the way down the curve in 1992, 1993
and more recently in 1996. Some homeowners used
zero-point/zero-fee adjustable loans to refinance
and get a new teaser rate every year.
The way this works is based on rebate pricing,
sometimes also known as yield spread pricing,
and sometimes known as a service-release premium.
The basic idea is that you pay a higher rate
in exchange for cash up-front which is then
used to pay the closing costs. You will pay
a higher monthly payment––so the
money is really coming from future payments
that you will make.
You can also think of this as negative points!
For example a 30-year fixed loan may be available
at a retail price of :
8.0% with 2 points or
8.25% with 1 point or
8.5% with 0 points or
8.75% with -1 point or
9% with -2 points
On a $200,000 loan, the loan officer can offer
you 8.75% with a cost of -1 point, which is
a $2,000 credit towards your closing costs.
A mortgage broker can use rebate pricing to
pay for your closing costs and keep the balance
of the rebate as profit.
What are the benefits of a zero-point/zero-fee
loan?
The main benefit is that you have no out-of-pocket
costs. As a result, if the rates drop in the
future you could refinance again even for a
small drop in rates. So if you refinanced on
the zero-point/zero-fee loan to get a rate of
8.75% and if the rates drop 1/2%, you can refinance––again
to 8.25%. On the other hand, if you refinanced
by paying 1 point and got a rate of 8.25%, it
may not make sense to refinance again. Now,
if the rates drop another 1/2% a zero-point/zero-fee
loan can drop your rate to 7.75%, whereas if
you paid points you may have to do a breakeven
analysis to decide if refinancing will save
you money.
The zero point/zero fee loan eliminates the
need to do a break-even analysis since there
is no up-front expense that needs to be recovered.
It also is a great way to take advantage of
falling rates.
Some consumers have used zero-point/zero-fee
loans on adjustable loans to refinance their
adjustables every year and pay a very low teaser
rate.
What are the disadvantages of a zero-point/zero-fee
loan?
The main disadvantage is that you are paying
a higher rate than you would be paying if you
had paid points and closing costs. If you keep
the loan for long enough you will pay more,
since you have higher mortgage payments. In
the scenario where you plan to stay in the house
for more than 5 years and if rates never drop
for you to refinance, you could be wind up paying
more money. On the other hand, if you plan to
stay at a property for just 2-3 years, there
really is no disadvantage of a zero-point/zero-fee
loan.
Whose money is it?
Since you are being paid "cash" up-front
in exchange for a higher rate, it really is
your own money that will be paid in the future
through higher payments. Investors who fund
these loans, hope that you will keep the loans
for long enough to recoup their up-front investment.
If you refinance the loans early both the servicer
and the investor could lose money.
To summarize, zero-point/zero-fee loans in
many cases are good deals. Make sure however
that the lender pays for your closing costs
from rebate points and NOT by increasing your
loan amount. So if your old loan amount was
$150,000 your new loan amount should also be
$150,000. You may have to come up with some
money at closing for recurring costs (taxes,
insurance, and interest), but you would have
to pay for these whether you refinanced or not.
Zero-point/zero-fee loans are especially attractive
when rates are declining or when you plan to
sell your house in less than 2-3 years.
Zero-point/zero-fee loans may not be around
forever. Lenders have discussed adding a pre-payment
penalty to such loans, however few lenders have
taken steps to implement such a measure.
Getting
the lowest rate
Don't waste your time trying to get the absolute
lowest rate in the market!
Instead, focus on getting a good rate with
a company that you can trust on delivering promised
rates. There are just too many stories of consumers
who were promised an incredibly low rate only
to find out that rates/fees were different at
closing. Getting the lowest rate is meaningless
if you do not close escrow with that rate! If
price was the only consideration, then everyone
would be driving Yugos!
Here is a list of things to do when
shopping for a rate:
Get a good-faith estimate of closing
costs in writing. When comparing lenders,
pay close attention to the loan fees on the
estimate. Other fees such as title charges and
government recording-fees are independent of
the loan, and so are irrelevant when comparing
lenders. These are normally paid to companies
other than the lenders. Compare the loan fees,
points and the interest rate.
Find out what the APR on the loan is.
Use this as a guideline to shop for
loans. Unfortunately, APR is not well-defined,
so different lenders may calculate the APR differently.
You cannot depend solely on the APR.
Find out how long the rate is valid
for. A company might quote you a really
low rate on a 10-day lock. This means you have
to close your loan within 10 days. Most lenders
will not let you lock in a 10-day lock unless
your loan is already approved. Always ask for
at least a 30-day lock.
When you lock in your interest rate, get the
rate, the points and the length of the lock
in writing.
If you are locking in an adjustable
loan, make sure you know the margin, the adjustment
caps and the life cap. If you are unsure
about these terms check out our reference desk.
If you do business with companies who
publish rates on the Internet, monitor their
rates over time. Some companies may
have low rates one week and higher rates the
following week. Unless you are locking your
rate on application, it is a good idea to work
with companies that have consistent pricing
strategies.
Should you work with 2 lending sources?
Loan officers and mortgage brokers work hard
to earn their money––just like you
do. They spend many hours trying to make your
deal go through and deserve to be compensated
for that effort. Nothing is more frustrating
in a loan officer's life than to find out that
she has been "double-apped" (a borrower
has filed two applications with two different
lenders).
If you do work with two lenders––one
of them is going to take a loss, since they
do not make any money until you close. It is
only fair that you tell them up-front that you
are working with two lenders and that you may
not close the loan with them. You may offer
to compensate the lender that you do not close
a loan with. For example, you may offer to pay
the loan processing fee that is charged by that
lender.
Working with two lenders can be like having
two wives––hard and time-consuming.
One lender might have a better rate on a given
day and you decide to lock with them, and on
the next day the other lender may have a better
rate! You may also have additional costs––such
as duplicate credit report fees, appraisal fees,
etc.
In most cases it may be better to work with
a lender or broker that you trust and feel comfortable
with. Working with multiple lenders will only
raise costs for everyone––since
the lender that takes a loss will have to pass
this on to other customers.
When
do you Lock the Interest Rate?
You know that rates have hit bottom ONLY when
they start rising!!
Interest rates change daily based on
:
New economic data. Review
the article How does economic news affect interest
rates?
Supply and demand of debt. Example:
if the U.S. government is selling 30-year bonds,
this increases supply and may cause rates to
rise if there is insufficient demand. On the
other hand, Japanese investors with a lot of
money and tripping over each other to buy U.S.
bonds will increase demand and cause rates to
drop.
Inflation. High inflation or a possibility
of higher inflation causes rates to go higher.
The reason for this is that, if inflation is
high, the Federal Reserve would raise rates
to curb inflation.
Political news and world events. A
war in the Middle East would cause higher oil
prices.
Market sentiment.
Bond rates and prices vary inversely––i.e.
when bond prices rise, interest rates fall and
vice-versa. The 30-year bond is one of the most
relevant rates to track. However, the yield
of mortgage-backed securities is even more important.
This is because the supply and demand for mortgage
securities may be different than for 30-year
bonds. There are times when bond prices move
higher and mortgage security prices move lower.
Interest rates are volatile and move up or
down for the strangest reasons just like the
stock market. If you want to follow interest
rates, you may want to do the following:
Find out all the economic news being released
over the next two weeks.
Check out this month's economic calendar.
Make a list of news that is most important to
interest rates––inflation, industrial
production, etc.
Follow bond- or mortgage-backed prices on a
daily basis. These rates influence mortgage
rates.
Follow mortgage interest rates on a daily basis.
Bookmark web sites or obtain rates via e-mail.
In general, Fridays and three-day weekends are
bad for interest rates. This is because traders
hate uncertainty. In many cases, traders close
out positions before a weekend, which often
means that they have to sell bonds which causes
rates to go up.
Bookmark interest-rate trends.
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