Timing the market to land a mortgage with the lowest rate...
August 10, 2009
"Success is a science; if you have the conditions, you get the result." ~ Oscar Wilde
Saw this article and liked it's content, spreads between ARM rates and 30-YR Fixed are getting much larger. While there are many pro's and Con's to consider, if you are not going to be in your current home for more than 7 years you may want to consider an ARM solution and save.
Timing the market to land a mortgage with the lowest rate is like trying to hit a moving target. Mortgage rates can fluctuate over a few days or several weeks. The leading indicators that influence rates vary depending on the type of mortgage for which you’re approved and whether it’s a fixed rate or an adjustable rate (or ARM).
Before the downturn, some mortgage rates could be tracked and predicted relatively easily because a few leading indicators were more closely bound to rates, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. For example, fixed-rate mortgages moved in closer lockstep with 10-year Treasury yields than they do now. Now, those rates are heavily influenced by other factors, including the unemployment rate, consumer spending and fear of inflation, he says.
According to the most recent data from HSH Associates, average mortgage rates are down from one month ago. The average rate for a 30-year conforming mortgage was 5.42% for the week ending July 31, compared to 5.55% for the week ending June 26. The average rate on a 15-year mortgage for the last week of July was 4.85%, down from 5.01% in the last week of June. And the average rate on a 5/1 ARM (the most common ARM, whose interest is fixed for the first five years and then becomes variable) was 4.89%, down from 5.14% in the week of June.
These lower rates are well above the near-historic lows they touched earlier this year. For the week ending May 1, the average rate on a 30-year fixed mortgage hit 4.96%.
“Trying to time the bottom of the marketplace is like trying to time the stock market,” Gumbinger says. “Even insiders don’t know when interest rates may change quickly.”
Borrowers can lock in a mortgage rate with a few weeks or more left until closing is completed. This is particularly useful if the borrower believes rates will soon increase. But navigating this process can become tricky and even costly.
Here’s what borrowers should know about locking in mortgage rates.
When is the right time to lock in a mortgage rate?
In most cases, buyers must first find the home that they want to buy and sign a purchase agreement on it. That often requires a deposit of around 5% of the home’s purchase price, says Gibran Nicholas, the chairman of the Ann Arbor, Mich.-based CMPS Institute, which trains and certifies mortgage lenders and brokers.
Then, once your lender has told you the mortgage for which you have qualified, ask if you can lock in the rate through the closing process, which usually lasts around 30 days.
What are the pros of locking in a mortgage rate?
Locking in a mortgage rate eliminates uncertainty for the buyer, says Buz Livingston, a fee-only certified financial planner in Santa Rosa Beach, Fla. You’ll know whether you can afford your mortgage and in most cases what your monthly mortgage payments will be.
When a shopper finds a mortgage at a price level that they can afford, they should lock it in, says Gumbinger. Otherwise, they run the risk of ending up with a higher rate, which could result in a smaller mortgage that doesn’t cover the cost of the home.
What are the risks?
Consumers who pay a fee to lock in a rate could end up losing out on the savings they’re after, Cummings says. Even if the lock-in rate is lower than rates four months from now, the fee you’ve paid could wipe out the savings you had hoped to reap from the lower rate.
Those who walk away from a mortgage after they lock in a rate stand to lose the money they gave the lender, including an application or appraisal fee or the fee they paid to lock in the rate or extend the lock, Cummings says. Fees vary, depending on the lender.
What are the leading indicators that are pegged to mortgage rates?
Interest rates on fixed mortgages are determined by mortgage-backed securities or mortgage bonds that trade on the bond market, Nicholas says. When there’s demand for mortgage bonds, mortgage rates drop, and when that demand declines, rates increase.
The Federal Reserve plan to purchase more than $1 trillion of mortgage-backed securities by the end of the year, which has helped lower rates, Nicholas says. (Reliable mortgage lenders will keep track of when the Fed buys mortgages to handicap a rate drop, he says.) Also, as economic indicators – including unemployment figures, consumer spending and concerns about inflation – worsen, rates on fixed mortgages drop, Gumbinger says.
Interest rates on ARMs are typically tied to either short-term Treasurys or the LIBOR, which is the interest rate that banks charge each other for short-term loans. The rate on the 5/1 ARM is often pegged to the 12-month LIBOR, Nicholas says.
What kind of buyer is best suited for fixed-rate mortgage vs. an ARM?
Buyers who plan to stay in a home for the long term or who can’t stomach the risk of a variable mortgage rate are better off with fixed-rate mortgages, Livingston says. Long-term homeowners often include families with young children that move into a neighborhood for the schools.
ARMs make sense for borrowers who plan to stay in a home for the number of years that the mortgage’s rate is fixed, especially if that temporarily fixed rate is significantly lower than what’s offered in a fixed-rate mortgage, Cummings says. Newlyweds who plan to upgrade or individuals who are transferred to new locations for work every few years often benefit from an ARM.
What about locking in when refinancing?
The benefits of locking in a rate when you’re refinancing become apparent more quickly than when you’re buying a home. That’s because once you’re quoted a new mortgage rate, you can compare it to the rate you’ve been paying so far. Assuming the new rate is lower, you should consider locking it in, Nicholas says.
Before you can lock in a rate, you’ll typically have to pay for a home appraisal (costs vary, but they are often around $500) and around $30 to $50 for your credit report.
Have a great week and good luck with your clients’ whether they are buyers or sellers
As usual stay informed, stay in touch and remember the Valeo-Croy team is here for you. 704-366-7711 Deanna, Todd and Ryan
Today's Rates:
30 YR Fixed - 5.375%
30 YR FHA - 5.500%
15 YR Fixed - 5.000%
5/1 ARM - 4.125%
7/1 ARM - 4.500%
30 YR Fixed JUMBO - 6.375%
5/1 ARM Jumbo - 5.625%
7/1 ARM Jumbo - 6.000%
5/1 <70% LTV - 5.750%
The Valeo-Croy Team and Cunningham and Company Mortgage Bankers are equal housing lenders
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