Mortgage rates will go up this year.  (yes, a bold statement)

The government has been tapering off the purchase of mortgage backed securities and will finish at the end of the first quarter of 2010.  We all know that since the government started to purchase mortgage backed securities back in early 2009,the mortgage rates first dropped, and stayed, in the low 5 percent’s/upper 4 percent’s.

How Credit Card Debt Affects Your Credit Scores (popular article)

Even today, we are still at historic low mortgage rates, but this party will come to an end.  Probably faster than most of us are even anticipating.  The only question that remains is, “How much will the mortgage rates rise?”, not “if” they are going to rise.

It’s extremely hard to say how investors will react to the sudden stop of the government’s actions, but the inevitable of mortgage rates rising will happen.

If you are considering a mortgage refinance into a lower rate, now is the best, and probably the only, time to lock in those historic low mortgage rates.

Read more about mortgage rates at:  History of the mortgage rates.

Here is a direct link to a great chart that shows the history of the mortgage rates:  http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp

Amazing how they go up and down, hey?

You can go directly to Mortgage News Daily to adjust the chart to see the history of the mortgage rates for other years.

What’s important to understand when looking at the history trend of the mortgage rates, they usually go up, then back down.  Go down, then back up.  It’s quite the roller coaster ride and if you don’t normally follow them, it can cause a lot of confusion.

One of the easiest rule of thumbs to follow when it comes time to decided when to lock in that low interst rate, is to focus on your personal goal.

Are you looking to lower your monthly payment as low as possible?
Are you looking to save the most amount of interest over the life of the mortgage loan?

When is comes to refinancing your mortgage loan, most people will focus on the amount of monthly savings they can accumulate from the refinance.  This is mostly because we live our lives month to month, when it comes to our bills.  If you are looking to save $100 a month on your mortgage payment with your refinance, you should really think about locking your rate when that $100 savings is there.  Don’t let greed overcome you, lock in that interest rate when you reach your goal of a $100 monthly savings.

Same goes for the goal of saving the most amount of interest possible when refinancing your mortgage.  If your goal is to reduce your rate just 0.5% and this saves you tens of thousands over the life of the mortgage loan, then lock your rate in at 0.5% less than your current mortgage rate.

Every situation is different, because a person with a $100,000 mortgage loan may not refinance to save just 0.5% on their rate, versus the person with a $400,000 mortgage loan.  The savings in interest is dramatically different!

I know looking at the history of the mortgage rates will not give you the crystal ball of when to lock in the low rate, but it certainly helps in making the decision.

The ups and the downs…the ups and the down!

The mortgage rates continue on their typical roller coaster ride over the last few weeks.  At one point, we saw lenders at 4.5% on a 30 year fixed rate, then about a week ago the 30 year fixed rate was at 5.5%.  What a difference that can make on your mortgage payment!

Some of the best advice you will read about refinancing your mortgage will talk about lowering the interest rate.  Yes, low interest rates are what you should focus on, but don’t forget the many factors that should go into figuring out if a refinance benefits your situation.

What to focus on when looking to refinance.

Most of us live our lives month to month.  Why?  Our bills are due once a month and bills are a major part of our everyday life.  Because of this, most people just focus on the new monthly payment the mortgage refinance will give them.  There are other things you need to factor into your decision on whether or not you are going to refinance.

Here they are:

The amount of interest you will be saving over the life of the loan.

It’s a beautiful thing to be able to save $100 dollars a month on your mortgage payment.  That’s $1200 per year!  That’s a pretty nice savings.  Now, the amount of interest you will save over that first year will be in the thousands!  Tens of thousands over the many years you will have the loan.

Here is a good example of how much interest you can save with a refinance.

The amount of years you could reduce from the mortgage term.

This is something most people don’t even realize when they go to refinance their mortgage loan.  Some lenders will be able to put you in a 25 or 20 year mortgage loan and the interest rate is about the same.

For example, on a 150k mortgage at 5.5% on a 30 year, the payment would be $1135.58 (just principal and interest).  On a 25 year loan with the same terms, the payment is $1228.17.  That difference is only $92.59 per month!

Most of us won’t even consider refinancing the mortgage without saving $100 per month, so if you don’t need the savings, then reduce your term by 5 years.  You’ll be 5 years closer to the American Dream…owning a home free and clear!

 The amount of closing costs vs the interest rate.

Most lenders will be able to offer you higher closing costs for a lower interest rate.  Sometimes you can take a higher rate in exchange for lower closing costs.  You should take the time to look into paying more costs for a lower interest rate. 

If you have some equity in your home, you can even include those extra costs into the loan, so you don’t have to come out of pocket for those extra costs.  Take the time to figure out the amount of interest you will be saving, because if you are going to be in the home for the next 10 years or more, it could make a lot of sense to pay for a lower interest rate.  Here is a post that goes over an example on the amount of interest saved with a lower interest rate.

When looking at refinancing your mortgage, keep in mind that there are multiple factors when looking at the benefits of your refinance.

Don’t forget to check your credit report before applying for the refinance!

We hear all the time that if you have credit scores in the 700’s, then you have excellent credit.  This is not always the case if you are looking for the absolute best interest rate for a mortgage loan.  You see, given the recent changes in the lending environment, the credit score has become more important than ever.

I’m going to lay out some very specific examples that show why a 700 credit score versus higher credit scores, means all the difference in mortgage interest rates.  You will also notice the thousands of dollars in savings, over the life of the mortgage loan, that is saved with a lower mortgage rate.

Now, let’s imagine for a moment that interest rates are determined by credit scores solely and not the other factors that usually go into determining your mortgage interest rate.  I say this, because mortgage interest rates can be a complicated beast.  I sometimes wish a customer could call me with the question, “What are your interest rates?” and I could give him/her a quick and simple answer.  Unfortunately, that question is not as easily answered as one would think.  Why?  Mortgage interest rates are determined by the following:

• Credit score.
• Loan amount.
• Property value.
• Type of property.
• Transaction type (cash out refinance, purchase)

…and these are not all of them.

Ok, let’s get back to the topic at hand…how important are credit scores?

First, remember that in the mortgage world, we go off the middle of the three credit scores.  So, if you happen to only know one of your credit scores, make sure you know all three credit scores from the three major credit bureaus.  Experian, TransUnion, and Equifax.

Everyone should check their own credit report for errors.  Especially, if you plan on applying for a loan in the near future.

Now, check out these 3 specific examples and notice the difference in interest paid, compared to the credit score.

 Example 1

Your middle credit score is 700.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1274.95.  The total amount of interest you pay just for the first 5 years is $57,090.31

Example 2

Your middle credit score is 720.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 4.75%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1238.91.  The total amount of interest you pay just for the first 5 years is $54,143.08

Example 3

Your middle credit score is 740.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1221.08.  The total amount of interest you pay just for the first 5 years is $52,672.05

The amount of interest you save in the first 5 years of your mortgage is $4418.26.  Want to know the savings over the life of the mortgage?

It will be in the next post.

Moral of the story:  Check your credit scores before applying for a mortgage, any loan for that matter, because it will save you thousands!

It was late December 2008/early January 2009 when the media first announced the talk of the government trying to drop mortgage interest rates as low as 4.5%. 

We are now in early March and no one seems to be able to find the 4.5% 30 year fixed rate….unless you want to pay points or thousands of dollars in closing costs.

Why haven’t we seen the 4.5% rate yet?  Well, without trying to confuse anyone, I’m going to explain in lehman’s terms the best way I can…

The FED announced that they would become active in buying mortgage backed securities, because they know these securities (a.k.a. mortgage bonds) have a direct effect on the mortgage rates.  Without getting into to much detail, mortgage bonds are bought and sold by investors just like stocks in the stock market.  When the price of mortgage bond start to increase, investors start to rally and buy, buy, buy before the price is to high to resell for a profit.  The same goes when the price of mortgage bonds start to drop and investors sell, sell, sell.

Well, think about this, when the government steps up and starts to purchase these bonds (and we are talking billions of dollars a day sometimes), investors see the price of mortgage bond start to rise, so this would case them to buy, buy, buy.  When the mortgage bonds prices rally in price, this causes mortgage rates to drop.

This happened the week following Thanksgiving in 2008, where, in one day, mortgage rate were about a whole point better than the day before.  In the mortgage world here, that’s a huge difference in just one day!

Unfortunately, there are two negative things that have happened, since the FED started to purchase mortgage back securities and major drop in mortgage rates:

1.  2008 was a sad year, because many lenders either went out of business or laid off a lot of their employees just to stay in business.  So, coming off a year where things were really slow, an overnight flood of mortgage refinance applications caused lenders to become overworked and understaffed.  You would think the lenders would do what any business would do when you get to busy and hire more employees.  Well, additional help was hired, but not much, because most lenders think that this sudden rush of business will only be temporary.

So, how do these lenders react to the sudden influx of business?  They increases mortgage rates to control the amount of volume they can handle.  As turnaround times and processes came back down to normal, they would adjust their rates back to where they should be.  I know, call it unfair or call it what you think, but we are all at the mercy of these lenders.  If the mortgage rates should be lower, they should give them to the consumer!

2.  The rise in Treasury yields  are poised to see their worse month since March of 2004.  (source: bloomberg.com)  This has caused an increase in mortgage rates as well.  This seems to be offsetting the moves the FED is taking to lower the mortgage rates.

People are starting to either get worried or give up on waiting for this magical 4.5% mortgage rate.  Some of my own customers have locked in their rates over the last few days and I don’t blame them.  If you are happy with the current market rate and it helps reduce your mortgage payment, lock it.  Don’t let greed blind you, because any mortgage rate below 6% is still considered historically low for mortgage rates.