Your Questions About Mortgage Rates

David asks…

Where can I find out current home mortgage rates for my area?

Does anyone know where I can find out the current mortgage rate averages for my geographic area? I’m looking at possibly refinancing and want to know if it would be worthwhile. Also, can I expect any costs when trying to refinance?

admin answers:

All over ONLINE. The only problem is, that you don’t get that rate until you lock it, or you have a honest mortgage broker on your side, which might be willing to lose on the Yield Spread if he doesn’t lock it, if rates happen to go up, from the day you were quoted on Good faith Estimate.

The minute you’re quoted a rate you like to proceed with, instruct lender or broker to lock, and provide form that states the fact and that their committed to lend at that rate.

When lenders “lock”, they commit to lend at a specified interest rate and points, provided the loan is closed within a specified “lock period”. (Points are an upfront charge expressed as a percent of the loan amount). For example, a lender agrees to lock a 30-year fixed-rate mortgage of $200,000 at 7.5% and 1 point for 30 days. A lock is contingent on the borrower meeting the lender’s underwriting requirements for the loan.

The need for locking arises out of two special features of the home loan market: volatility and process delays. Volatility means that rates and points are reset each day, and sometimes within the day. Process delays refer to the lag between the time when the terms of the loan are negotiated, and the time when the loan is closed and funds disbursed.

If prices are stable, locking isn’t needed even if there are process delays. If there are no process delays, locking isn’t needed even if prices are volatile. It is the combination of volatility and process delays that creates the need for locking.

For example, Smith is shopping for a loan on June 5 for a house purchase scheduled to close July 15. Smith is comfortable with the rates and points quoted on June 5, but a rate increase of 1/2% within the following 40 days could make the house unaffordable, and Smith doesn’t want to take that risk. Smith wants a lock, and lenders competing for Smith’s loan will offer it.

If locks were equally binding on lender and borrower, locks would not cost the borrower anything. While lenders would lose when interest rates rose during the lock period, they would profit when interest rates fell. Over a large number of customers they would break even.

In reality, however, borrowers are not as committed as lenders. The number of deals that don’t close, known as “fallout”, increases during periods of falling rates, when borrowers find they can do better by starting the process anew with another lender. Fallout declines during periods of rising rates.

This means that locking imposes a cost on lenders, which they in turn pass on to borrowers. The cost is included in the points quoted to borrowers, which are higher for longer lock periods. The lender who quoted 7.5% and 1 point for a 30-day lock, for example, might charge 1.125-1.25 points for a 60-day lock.

Years ago, lenders controlled lock costs by requiring borrowers to pay a commitment fee in cash. The fee was returned to them at closing but forfeited if they walked from the deal. But today, commitment fees have mostly died out. Borrowers don’t like them, and lenders and mortgage brokers don’t want to place themselves at a disadvantage in competing for customers.

To control lock costs today, many lenders refuse to lock until borrowers demonstrate commitment to the deal by completing one or more critical steps in the lending process. For example, one lender recently explained its lock policy to its mortgage brokers as follows:

Our loans are well priced, but we only commit to you when you commit to us. To lock, you must submit the completed lock form, application (original, no copies allowed), credit report, appraisal, and either a purchase agreement or escrow instructions.

The logic of this lender’s policy is that its procedural requirements reduce fallout costs, allowing it to offer lower prices. Lenders who make it easy to lock have large fallout costs because some shoppers will lock with them as protection against a rate increase while they continue to shop for a better deal elsewhere.

While the best (honest) quote is likely to be from a lender who requires extensive documentation to lock, these requirements impede effective shopping. For example, if the shopper identifies the lender offering the best deal but it takes 3 days to lock with that lender, the shopper is in limbo for 3 days. He has to hope that market rates don’t increase during the period, and if they do that the lender doesn’t pad the increase.

A mortgage shopper thus needs to know what each lender requires to lock, and how quickly the process can be completed if the shopper does her part. A good mortgage broker can help enormously. Brokers know lender lock requirements, can help expedite the process, and will keep the lender honest if the market changes during the lock process.

Sandra asks…

Where can you check to get the best mortgage rates?

I need good mortgage rates in Los Angeles.

admin answers:

Try the local credit union.

Charles asks…

How do you shop around for the best mortgage rates?

Our realtor suggested we speak with the woman in her office who does mortgages. Other people are telling me to shop around. How can we do this without it effecting our credit scores? Won’t our scores drop if we apply with several banks and they need to check our information?

Also, how do we know what lenders to seek out for the best rates?

admin answers:

You don’t need to apply to different banks to find out their rates. If you know your credit score, then you can get a fair idea before they do any kind of credit check.

Look at sites like bankrate.com. Lendingtree.com to get comparisons.

ETA: I was always told that having 3 or 4 credit inquiries in a short space of time wouldn’t really hurt you. Although your score might drop a few points, the companies expect you to be shopping around for the best deal, so it’s not like you are applying for 20 credit cards at once, or anything like that.

James asks…

To what extent, mortgage rates impact on the behavior of property investors?

Do the impact of mortgage rates the same as the interest rates‘?

admin answers:

Of course. People are much more likely to invest in real estate at a 4% APR, then at a 10% APR (which is what the average APR was back in the 80’s).

Lizzie asks…

What is causing mortgage rates to drop?

I would like to hear your take on why this is happening . For 3 straight weeks, interest rates have been dropping on 30yr mortgages. My rationale : I think they are falling because the mortgage lenders do not have enough demand but an over-abundence of capital from foreign countrys as the USA keeps buying more imports than selling the world stuff, and its causing another imbalance where the countrys are running out of places to invest.I also think it’s further proof the housing bubble has popped…..I suppose many here will say it’s going to be good for housing as there is no ‘bubble’. I’d still like to hear from you.

admin answers:

On a very fundamental basis, it is that mortgage demand has dropped. Rates can only decrease if the mortgage lenders (1) have access to cheaper funds (2) willing to squeeze their margins.

Regardless of the trade imbalance we currently have, mortgage lenders have money to invest in mortgages and are lowering rates to do it.

It is a further sign that a recession is right around the corner. When the yield curve inverts (longer rates are lower than short term rates), a recession is coming. Just in time for the 2006 elections!

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