Do No Point Loans really Save the Client Money?

Why was my No Points Refi More Expensive in the Long Run & What Makes Mortgage Rates Change from day to day, A Crash Course in Mtg. Rate Movements 101 One of the most important aspects to consider when applying for a residential or commercial mortgage loan is not just getting the lowest interest rate, but also the best overall total loan package (rate, fees, terms of loan). For most homeowners & commercial property owners, this usually means a low fixed or interest only mortgage loan. I do Not recommend any Negative Amortized Loans in our current residential market - when home values are flat or declining. Total Package Costs of the Loan can be tricky to compare what is truly the lowest or best loan for each borrowers specific needs. An experienced and trusted loan advisor can assist in comparing all aspects of each loan program and help determine what's the best fit for you or your client. Case in point - Often times those No Points loan offers you see on T.V. (The Ditech's, etc.) or flooding your inbox and mailboxes are misleading as No Points does Not mean Free or the Lowest Rate - The borrower is effectively eliminating upfront points by paying into a higher interest spread out over the term of the loan. In essence you're "buying Up the Rate" often times by a full 1%. Instead of 5.875% and 1.5 points, you might get 6.625% with no point, but you never get the 5.875% rate And the zero points too. No cake and eat it too here, I'm sorry to say. Ever received a too good to be true, slick direct mailer from XYZ Mortgage? You know the one's that combine the Best of All Loan Programs to look like you get that 5.875% rate with no costs. Yep, it's called "truth in advertising" and folks there's no truth in most of these mailers. They just want their phones to ring, not caring at all how they went about it? My recommendation on a No Points loan is simply this - It should only be considered when the property will not be held long term or more than 2 to 3 years. Now, for those of us who really want to know & learn (or brush-up) how it all works, please refresh your coffee or soda and read on. Here's Part deaux Let’s take a look at what makes mortgage interest rates move: Although there are myriad different factors that affect interest rates, the movement of the 10-year Treasury Bond is said to be the best indicator to determine whether Mortgage Interest Rates will rise or fall. But why? Most mortgages are packaged as 30 year products, and the average mortgage is paid off or refinanced within 10 years, the 10-year bond is a great bellwether to measure interest rate change. Treasury obligations are also backed by the “full faith and credit” of the United States Treasury, making them the benchmark for many other bonds as well. 10 yr. Treasury bonds, also known as Intermediate Term Bonds, and long-term mortgages, known as Mortgage-Backed Securities (MBS) also compete for the same investors because they are very similar financial instruments. However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as Payment Defaults and early repayment, and thus carry more risk and must be priced higher to compensate against defaults and foreclosures. So how will I know if mortgage rates are going up or down? Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates. To get an idea of where mortgage rates will be, bond investors typically use a spread of about 170 basis points, or 1.7% above the bond yield to estimate interest rates. So a bond yield of 4.00 plus the 170 basis points would put interest rates around 5.70%. Of course this spread can vary over time, and is really just a quick way to ballpark mortgage interest rates. There have been, and will be periods of time where mortgage rates rise faster than the bond, and vice versa. So just because the 10 year bond rises 20 basis points doesn’t mean mortgage-backed securities will do the same. In fact, MBS could rise 25 basis points, or just 10 points, depending on other market factors. What other factors move interest rates? Factors such as supply come to mind. If loan originations skyrocket in a given period of time, the supply of mortgage-backed securities will rise beyond the demand, and prices will need to drop to become attractive to buyers. Timing is also an issue. Though bond prices may plummet in the morning, and then rise by the afternoon, mortgage rates may remain unchanged. That’s because sometimes the bond movement doesn’t always make it down to the wholesale markets, or simply because it takes more time to do so. Inflation also greatly impacts mortgage rates. If inflation fears are strong, interest rates will rise, but in times when there is little risk of inflation, mortgage interest rates will most likely fall. Economic activity will impact mortgage interest rates. Mortgage rates are more susceptible to economic activity than treasuries, mainly because the average consumer or homeowner may lose their job or be unable to make their Mortgage Payments while the US government typically doesn’t miss payments. For this reason, jobs reports, Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on the economic calendar can move interest rates significantly. And don't forget the Fed. When they release “Fed Minutes” or change the Federal Funds Rate, interest rates can swing up or down depending on what their report indicates about the economy. Generally, a growing economy leads to higher interest rates and a slowing economy leads to Lower. As a very general rule of thumb, bad news brings on lower rates, and good news makes rates climb. The situation is a lot more complicated, so consider this is an introductory lesson on a very complex subject. And remember, these base rates don’t take into account any Rate buy-downs or fees that could drive your actual interest up or down. If you're still with me at this points, Congratulations, you've just graduated from my crash course in What Moves Mortgage Rates 101! Foot note; The O.C. Mortgage & Real Estate blog's goal is to educate and inform, sometimes with humorous anecdotes and personal observations taken from past 24 years in the mortgage/real estate industry. Sometimes a more nuts and bolts approach in getting you the information I think you should know about or brush-up on. My intentions are also to spark a thought or idea and get some dialogue and feedback from you, positive or negative. Suggestions for future topics are also encouraged! The industry in general has been knocked down for an 8 count and is trying to get up off the mat and shake off the ill effects of the post sub-prime era. Your comments about that alone are worth me writing this blog! Please let me know How We can Better serve Mom & Pop property owner/buyer going forward into 2009 and beyond.