Interest Rates: Interest Rates and Fluctuation
You may ask, " Why or how do Interest rates fluctuate? " or " Are interest rates going, up or down? " Well, to start, we currently think they may go down by May 2009 to 0 or 4.5% for the 30 year fixed. So if you want to lock into a low rate, (Apply Now). However, it is impossible to know for sure as there are quite a few different factors that all come together that have an effect on the fluctuation of interest rates such as: The government making changes in the fed funds rate, the U.S. the stock market and other markets going up or down, and most importantly changes in the U.S. treasury bills or bonds market. We like to discuss the factors of mortgage rates with our customers and where these interest rates come from because and educated customer is our best client.
Interest Rates: Fed Funds Interest Rates
The Federal Government is keeping a constant eye on interest rates. They believe that sometimes even the smallest change in interest rates can or will cause the business owners and general public to react a certain way. The predicted reaction helps the Federal Government keep inflation from getting out of their control, because if inflation gets out of control, the economy could suffer or collapse and we could fall info a recession or depression (note: recessions and depressions can be caused by a lot of things other than interest rates) One way they keep control is through the Fed Funds Rates. This is the rate that the government lends money to the banks. Obviously you the consumer don't get that rate because the banks have operating expenses and have to be able to make a profit somehow. Therefore usually the best rate you can get from the bank is called prime rate and is on average about 3% higher than the fed funds rate. Anyway, the way they keep control is they raise interestrates when the economy appears to be moving in a upward direction to quickly. This rise in interest rates makes business owners and individuals think twice before borrowing more money for investing or spending. Thus, slowing the economy favorably in the government's theory. The opposite is true for stimulating the economy. the government then lowers the fed funds rate so business owners and individuals spend more thus having a positive effect. How does fed funds rates effect the mortgage rates? When they raise the federal rates, the banks raise their rates accordingly. Therefore if you were to try to obtain a private loan, or non government based loan, your rate would most likely be higher. But, that has more to do with non-conforming loans and equity lines, since they are many times sold on private markets, as opposed to Fannie Mae or Freddie Mac (government institutions). In fact, Many times they are not sold at all but serviced in house by the lender that you obtained your mortgage from. When it comes to a Fannie Mae or Freddie Mac conforming loans, sometimes the interest rates that the government sets have very little actual effect on your bottom line mortgage rate because of other controlling factors such as the stock markets and bond markets.
Interest Rates: The Stock Market ?
Interest rates can change with the stock markets as well. However, If you try to factor in everything that affects the stock markets, you could quickly find yourself right back where you started only even more confused. So, to make this easy concerning this discussion, we will only talk about the stock markets being affected by the Fed Funds rate, the bond markets/U.S. treasuries or T-Bills, and the corresponding effect on interest rates.
The stock market can be affected by the Fed Funds Rate and vise versa because the government may raise the fed funds rate do to an over bullish (extremely optimistic) rising stock market which can have the effect of creating a lot of additional spending and wealth which in turn may create a rise in inflation. The On the contrary, If the stock market is a bear market (extremely pessimistic) or falling stock market then a negative effect the governments balance of inflation and the economy may become present. Therefore the government's overall solution of whether to raise or lower the Fed Funds interest rates, can be affected by the stock markets. Since you already know how a change in the Fed Funds rate can affect your mortgage interestrates, you can see where unbalanced changes in the stock markets can have a direct effect. But there is much more to this equation as Stocks and Bonds can have an effect on each other.
Interest Rates: The Bond Market/U.S. Treasuries/T-Bills.
Interest rates are directly affected by the bond markets/U.S. Treasuries/T-Bills which are affected daily by the stock market and sometimes when there is a change in the Fed Funds rate. Bonds in particularly the 3-year, 5-year, 10-year, 15-year, and 30-year treasury bonds, are the primary source of mortgages loans which are sold on the open bond treasuries markets. This buying and selling creates price fluctuations. These changes in prices vs the return or yield can make the bonds more desirable or less desirable in comparison to other investment opportunities. Therefore if the bond prices go up, the yield or rate of return on that bond goes down. This rate of return is directly related to interest rates. For example: If you could go buy a 30 year bond for $100,000 that has a rate of return of 4.5% fixed, then you could likely get a interest rate on your 30 year $100,000 mortgage of about 5.5%. As you may have noticed there is a spread between what you would get paid on your bond and what you would pay on your mortgage. This spread is what creates movement in the price of the bonds just as there is a spread that creates changes in stocks. Anyway the change in the prices of these bonds have a direct correlation to the change in the interest rates that a homeowner receives on their mortgage. Again as the price of the bond goes up, the ratio of percentage paid yearly on the bond falls so the effective rate of return drops thus dropping interest rates because mortgage rates actually come from the bond markets. You can watch what the interest rates are doing by checking out the 3,5,10,15,and 30 year treasury bond prices. If you want to try to get a better rate on your 30-year mortgage, you want the price of the 30 year bond to go up so the effective rate of return falls. Please note that although the bonds usually move in a similar direction concerning price, each bond moves independently. Thus while the 30 year treasury bond may go down in price, the 5 year treasury bond could actually go up. So don't always expect the same move in interest rates spread across all home loans programs. Although the bonds are the main determining factor of interest rates, they are only the range factor in determining your actual end mortgage interest rate.
Interest Rates / Interest Rates - Our Calculations
Now that you have the basics of where interest rates come from and how they are affected by the government, stock market, and bond markets, we can move on into discussing how the actual end interest rates you have the ability to get for your mortgage or mortgages are determined. There are several different factors which can affect the actual rates your entitled to. They are listed here in order of importance: Mortgage Amount or Loan amount, FICO score (your credit score), Income Information or Debt Ratios, LTV (Loan to Value) of the property, Property Type (SFR, Condo, etc), and Your Payment History from other loans.
Interest Rates: Your Mortgage Amount
The interest rates you receive on your mortgage(s) can be directly related to your loan amount due to the actual costs of doing a mortgage (see closing costs) will be higher in ratio on a lower loan amount than on a higher loan amount. It is very difficult and many times not possible for the mortgage lender or broker to cover some or all of the closing costs when the loan amount is low, therefore the only way the lender or broker can pick up some or all of the closing costs is to give you an upward adjustment to your interest rates. The higher interest rates generate a larger dollar amount paid back or (YSP yield spread) to the lender or mortgage broker for the loan. The more money the lender or mortgage broker has to work with, the less money they can charge you for closing costs or other related fees. However, because closing costs are about the same for $100,000 loan as they are for a $50,000 loan, this method of alleviating some or all of the closing costs for lower loan amounts doesn't necessarily work that well. Often in this situation the lender or mortgage broker would likely just give you the regular rate and have to charge you for the majority of the closing costs. However, if you loan amount in higher, you may be able to get some or all of your closing costs covered and/or possibly even get an even better interest rate. Although if your loan amount is too high (currently over $359,650) then you are now talking about jumbo loans which can be a whole different category of loan types and requirements (see Jumbo Loans) for more information. But for the record, the perfect normal loan amount range is currently between $150,000-$359,000. Between this range there are usually no problems with getting the greater portion of your closing costs covered while at the same time, getting the best interest rates.
Interest Rates: Your FICO scores
Your FICO scores (developed by the Fair Isaac Company) have a large factor in determining the interest rates that your entitled to. They range from 300-900 and are a lenders way of determining what category of borrower you are. Since credit scores are so important, you should take the time to read all of the information in our section on (FICO Scores). If you credit could use some improvement or you just want to know how to keep from hurting your credit, we urge you to visit that section. However, for now it is only important to know some basic information concerning your credit scores and how they affect your interest rates. It may be obvious that the lower your score, the worse your interest rates can become, but as a basic standard it is important that your middle score remains at or above 620 if you want a normal conventional loan from Fannie Mae or Freddie Mac with good interest rates. On the upside you may get special privileges and have a much easier time getting a loan if your credit score is 740 or above. Sometimes with excellent credit and a larger loan amount, you can get better interest rates. However there is just one more major hurdle to overcome before the lender or mortgage broker can do this and it involves proving your income.
Interest Rates: Your Income
Your income can have a large impact on the mortgage rates you get from a lender or mortgage broker. If you are a W2 employee, most lenders require the your last 2 years W2's for proof of income and they will use the gross amount earned outside of bonuses and commissions as your base income averaged over the two years to figure out your monthly gross income. In order to stay in the best category of interest rates, it is important not to exceed 50% of your monthly gross income for expenses such as mortgages, auto loans, student loans, credit cards, and other loans that are reported on your credit report every month. The actual Fannie Mae and Freddie Mac guidelines are 38%, but we have had a lot of success as long as it has remained under 50%. If for some reason you are over this limit, it doesn't mean you cannot get a mortgage or loan, it just means that you may be subject to higher interest rates. As you may have begun to notice, interest rates usually adjust according to the risk level of a borrower just like insurance payments adjust for risky borrowers. Think about it, would you rather lend money to your best friend with excellent credit and a good history of paying you back or your desperate friend who never has a penny on them? Well, the lenders work quite in the same manner so try to figure out where you fit before expecting particular loan programs or interest rates.
In addition, if you are a 1099 employee or self employed, your interest rates may end up being a little bit higher. However, it is a sacrifice that usually makes sense. You get to take a ton of tax deductions every year that bring down the bottom line of your gross income. Therefore you end up paying taxes on your money after all of your deductions. Most often this results in a huge savings of thousands of dollars but there can be a cost. When you apply to get a mortgage, you may be subject to higher interest rates if you have to use what is called a stated income program. This program was designed for 1099 and self employed persons so they could get a loan based on some different guidelines because often there income after deductions doesn't qualify them for the 50% or less debt ratios. The main problem here is in order to get a conforming stated income program, the borrower has to have a 680 credit score or better although as of late we have seen some go as low as 660. Even with this credit score problem solved, many lenders still have an asset test which requires 2-6 months reserves of PITI or (principal, interest, taxes, and insurance). Although this isn't the greatest of all situations to be in concerning your mortgage, it is still makes a good trade for the thousands saved with tax deductions. The best news about this we have some very special perks we can offer our customers that most other lenders or broker cannot. If you have $50,000 or more in equity in your home and your credit score is 740 or better, we can literally avoid all proof of income. This allows our borrwer(s) to get the best interstates possible and have an easier time than a doing a normal conforming full doc loan. If your someone who has great credit, a decent amount of equity in your home, and or some other compensating factors such as a money in stocks, bonds, 401K or IRA's, you can probably get the lowest costs, the best interest rates and have the easiest time doing so if your in that position.
Interest Rates: Your LTV (Loan to Value)
The mortgage amount you are trying to get divided by the actual appraised value of the home will give you the LTV amount. In order to get the best interest rates, it is important to try to stay at 80% LTV or less. Again with the insurance analysis, would you rather lend money to someone who needs 100% LTV or someone who only needs 80%? Were pretty sure we know the answer and it is the same philosophy the lenders go by when making rate determinations about you. However, there are some ways around this. One way is to do two home loans. One loan up to 80% LTV and a second loan (possibly and equity line) for the remainder needed. This keeps our customers out of paying PMI or (Private Mortgage Insurance) which is not tax deductible. It also allows our customers to get the best interest rates possible on both loans since they have kept themselves out of the non conforming range in the eyes of the lender. We have some special programs that most other lenders cannot offer when our customers need to borrow over 80%. In order to qualify you must be 50% or under on your debt ratio and have a credit score of 640 or higher. Please keep in mind that the rules and guidelines concerning mortgages and interest rates change quite often so what may be good today could be gone tomorrow or the other way around.
Interest Rates: Your Property Type
Whether your refinancing or your purchasing a SFR (Single Family Residence), Condo, or Site Condo may make a small difference in your interest rates. Other than a SFR, there are greater risks to the lenders for condo's and site condo's. In case you don't know, a site condo is a subdivision development type that has annual or monthly association dues to manage a common ground such as a median, a park, a clubhouse, a walkway, or even the streets themselves. Most builders are building site condo subdivisions these days because it is easier to get the planning and zoning approved. It takes about one year as opposed as several years for a regular subdivision. Since the home sell just as well if not better, it makes sense. However, as far as the lenders are concerned, there is a small greater risk involved. If you own a site condo, you could withhold from paying your dues which could result in a lean situation on your home from the association. Don't panic if this describes your home or home to be, it is usually a very small interest rate adjustment and since many of the site condos built today are a higher value, the mortgage broker will often eat the difference in interest rates. In a normal condo situation, the risk is resale and possibly a greater risk of the condo being burned down if it is attached. Normal condos range in price so depending on your loan amount, you may see a small adjustment to your interest rates or pay a small extra fee in closing costs.
Interest Rates: Your Payment History
Your mortgage rates can be affected by your payment history of your credit cards, your home loans, and other loans that show up on your credit report. You might have decent or even a good credit score but if you have a shaky payment history, or even just a few late payments, you may have put yourself in a higher category of interest rates. Sometimes, depending on the individual situation, you may have to actually wait to get a loan. The rule of thumb is checking the last year for late payments. This doesn't mean missing the grace period (normally 15 days on a mortgage), it means if you were over 30 days late on a payment in the last 12 months you may be scrutinized.
Interest Rates: Updated Interest Rates
Do you consider yourself educated yet? We'll you should because you now know more than most people would learn in year of economics concerning mortgage rates. Here are the base mortgage interest rates for an average loan amount of $175,000, Credit Score Over 620, LTV of 80% or Less, (Remember a second loan can be added for up to 100% financing). Also note that if you don't fit in the above described category you may still get a loan from us, but those interest rates may be different.
