What Causes Interest Rates to Go Up and Down?

Question #39 from HOW TO GET A MORTGAGE DURING & AFTER THE SUBPRIME CRISIS

Many, many economic factors! Strength and weakness of the dollar, the price of oil, how the Federal Reserve feels on any particular day, and much, much more.

The Real Deal: Many clients, especially on a refinance, want to wait until the Federal Reserve Board lowers interest rates next week to lock in an interest rate. Sounds good, but it's completely ineffective. The Fed determines two key indices: the Fed Funds Rate, which is an interest rate at which banks lend money to each other; and the Fed Discount Rate, a rate for lending to commercial banks. Neither of those indices directly affect interest rates of fixed or adjustable rate mortgages. However, the Fed's rate changes will affect your HELOC if your HELOC interest rate uses the prime rate as its index.

If you really want to know what mortgage interest rates are tied to, take a look at the 10-year Treasury note. There is not a direct correlation between the two, but most of the time as the 10-year Treasury note moves up and down, so do mortgage interest rates. So maybe the real question is what makes the price of the 10-year Treasury note go up and down? Although the answer may be complicated, as with most other items for sale, supply and demand determine price and rule the day. The greater the demand for the 10-year treasury, the higher the price-which means it's a good bet that mortgage interest rates will rise.

The Bottom Line: The Fed's concerns are about jillions of economic factors, not directly the interest rate for home mortgages. If the Fed slashes interest rates, don't expect a corresponding slash when you want to lock in your mortgage interest rate.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.

FHA Minimum Credit Scores

I've been getting a lot of questions regarding the minimum credit score for an FHA mortgage. I know, Larry Lender says the minimum score is 620, but Barbara Banker says she'll go down in the basement to a 500 credit score. Of course, you don't know who to believe because everybody seems to be full of manure. That being said, here's my take on it...

Many lenders are now requiring a minimum score of 620 to get an FHA mortgage approved. Some are saying 620, no exceptions, otherwise we won't play ball. Others are saying we'll go down to 500, but only for certain kinds of properties and only under certain conditions. Well, to make your life as simple as possible and reduce those ogeda flare-ups (or is it agita...who cares), do what you gotta do to raise your score above 620. But, if there's no hope to raise your credit score from the ashes in a short time period, here's what I've come to find out. If you're below 620, don't even think about getting approved for a 3- or 4-family FHA mortgage. As far as I can see, it ain't happenin'. I'm not saying it's impossible, but it's highly risky for a lender to approve it. Someone told me the default rate for 3- and 4-families is about 30%? Ouch! Would you loan someone money with a default rate that high? I think not.

Right now there are lenders who will go as low as a 540 credit score if the property is a 1- or 2-family. There aren't many which will do it, but some do exist. I know one lender which touts the credit score doesn't matter for a 1-family, as long as the deal makes sense. That means all of the other numbers and factors have to jibe regarding the deal, such as income, debt ratio, assets, extenuating circumstances, etcetera. Then you’d probably have to jump through multitudinous hula hoops, do back-backflips and give up your first born to get it approved, but so be it. So, what's the sense of it all?

Depending on how a lender does business -- meaning whether it's approved to underwrite FHA deals or whether it brokers the deals -- that may be the deciding factor regarding the lender you're dealing with. If your mortgage company is underwriting the loan and lending its own money, odds are 620 will be the minimum score. If the deal is brokered to an outside lender, then the minimum credit score requirement can dip down to 500 or below. When you go to Larry Lender and he brokers the deal, Larry isn’t lending his own money so he doesn’t care about credit score, debt ratio, etcetera – his money ain’t risk so it doesn’t matter to him.

Another factor is how your lender sells loans it underwrites to investors. Some lenders may have outlets to sell mortgages to investors with a credit score below 620, while others may not. Normally, if a mortgage can't be sold and/or traded like a baseball card, it won't be approved. Most lenders don't hold onto mortgages and sell them to Wall Street or whoever else will buy them. Also, if a lender holds onto your mortgage and doesn’t plan on selling it, it may make certain exceptions to get your loan approved.

Anyway, the real deal is that if someone says you can't get an FHA mortgage with a credit score below 620, that ain't reality on my side of the tracks. It can be done under certain conditions. You may have to put on your walking shoes and shop around, but sometimes it's worth it.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.

Reverse Mortgage Tidbits

My fellow Americans,

Some interesting news! In the soon to be released Obama Stimulus Plan, there is a provision which increases the maximum loan amount for a reverse mortgage up to $625,000 through December 2009. That sounds like pretty good stuff for those with bigger homes who want some monthly payment relief.

Just in case you're not familiar with the intricacies of the reverse mortgage, I'll give you the abridged 101 Cliff Note bullet points...

1. You (and your spouse if married) must be 62 years of age or older to get a reverse mortgage.
2. The reverse mortgage allows you to pull equity out of your home, in the form of cash to you, and you don't have to pay the money back on a monthly basis for as long as you're alive.
3. You must continue to have the home which has the reverse mortgage as your primary residence.
4. If you currently have a mortgage on your home, you can refinance into a reverse mortgage and pay off your old mortgage.
5. You don't have to worry about having income or good credit, it doesn't matter when getting a reverse mortgage.
6. The amount of the reverse mortgage depends on the value of your home, your age and your life expectancy.
7. The money you take out of your home can be paid to you in lump sums or installment payments.
8. Interest accrues on the money you take out of your home.
9. You can use a reverse mortgage to purchase a home.
10. You still must pay applicable taxes and insurance on your home.

That's probably more than enough to get you started, so let's look at a scenario. You're 65 years old and just retired. You're getting a small pension and social security. Your home is worth $300,000 and you have $100,000 left on your mortgage. You need a little money, maybe $30,000, to refurbish your home and make it a little more comfortable. Your monthly mortgage payment is $925, not including taxes and insurance. The problem is you can make your mortgage payment every month, but it's choking you financially. You hardly have any money left over at the end of the month to enjoy your retirement. You want to refinance and take money our of your home to spruce up your home, but starting over with another 30 year mortgage doesn't sound too delectable to you. Aside from that, you really can't afford it anyway. What do you do?

Well, this scenario may be tailor made for a reverse mortgage. You can get a reverse mortgage to pay off the $100,000 you have left on your current mortgage and take out $30,000 in cash. If you add on closing costs you may have a new reverse mortgage of approximately $135,000 to $140,000. The beauty is you don't have to make any monthly mortgage payments for as long as your home remains your primary residence. What you've done is put $30,000 in your pocket to use at your pleasure and you've eliminated the $925 monthly mortgage payment you previously had. What a deal!

Is there a downside? Yes and no. Yes, if you think about the fact that interest is accruing on the $140,000. That means if you sell your home 3 years from now, the loan could be maybe $155,000 (just as an example, depending on your interest rate). If it bothers you that your mortgage balance is increasing instead of decreasing, that can be an issue. Also, you may feel as though you're locked into your home because it must remain your primary residence for you to retain the right to not have any monthly mortgage payments. On the contrary, there is no downside if you don't care that interest is accruing on the $140,000 and you don't intend on moving, especially since you're livin' the high life because your cash flow has increased by $925 per month.

Of course, every scenario is different and it's best to speak to a professional and get all the facts. Feel free to contact me at any time.

Kirk Charles, 973-919-8065

Obama's Big Plan!

Well, finally we have something from the feds that can have a big impact on the housing crisis! Team Obama has scored a big win with the new stimulus plan that is set to take effect sometime in March.

Here are a few highlights...

• Enabling 4 to 5 Million Responsible Homeowners to Refinance. If you're underwater on your mortgage and it's owned by Fannie Man or Freddie Mac, you may be able to refinance into a much lower interest rate, given that you've been paying your mortgage in a responsible fashion. -- If you intend to stay in your home for the long haul, this sounds really attractive.
• Reducing Monthly Payments. There will be a low cost refinance for those who don't have 20% equity in their homes. -- This sounds good if you've been thwarted in your attempts to refinance.
• Helping Hard Pressed Homeowners Stay in Their Homes. This initiative is to help those struggling with mortgage payments because of an interest rate increase, yet cannot sell their homes. -- I assume homeowners will be allowed to apply for some sort of loan modification. Exactly how remains to be seen.
• Protecting Neighborhoods. When a home is foreclosed on all of the surrounding properties are affected negatively. There is some plan to help the surrouding homeowners retain their home values. -- I don't know how this one is going to work.
• Support for Responsible Homeowners. This plan will help homeowners get loan modifications before they start missing payments. -- How will these people be targeted?
• Shared Effort to Reduce Monthly Payments. This is a plan to bring a homeowners mortgage payment down to 38 percent of his monthly income by reducing his interest rate. Furthermore, there is incentive to get the mortgage payment down to 31 percent. Lenders will also be able to reduce the principal to bring down the monthly mortgage payment. -- This sounds like a winner, which is simply just modifying the mortgage to make it reasonable for the homeowner to pay each month.
• "Pay for Success" Incentives to Servicers. Mortgage servicers will get an up-front fee of $1,000 foe each eligible loan modification meeting guidelines established under the initiative. They will also receive monthly fees for three years, up to $1,000, as lon as the homeowner stays current on the loan. -- This sounds like a winner. There's no incentive greater than money to get the job done.
• Incentives to Help Borrowers Stay Current. A monthly balance reduction plan is proposed to those who pay their mortgage on time. -- For obvious reason this sounds like a winner too.

All in all, I think this plan is ambitious and can help a whole lot of folks who are in trouble, however there may still be a whole lot of folks who are left standing outside in the storm. If your mortgage ain't owned by Fannie or Freddie, what do you do? Are Alt-A and subprime loans eligible for the plan? It doesn't sound like it just yet. How will second mortgages be affected? How will the PMI companies handle insuring the mortgages?

What I'm really saying is I don't know what's going to happen. Things are still very much up in the air. We in the mortgage industry are anxiously awaiting guidelines from banks, investors, etcetera. This housing problem is so complicated that even if the President seems to have a perfect solution for it, it has tidal wave effects throughout the entire economy, the ramifications of which are obviously undetermined at this point in time.

But, aha, I did look into my crystal ball this morning. What did I see? My prediction is that this plan is going to help a lot of people and do a great job, but implementing it might be a pain you know where. It all seems to be one giant loan modification. The question is who is going to do all of the modifying???

Anyway, if you have any questions or concerns, contact me.