Your Questions About Mortgage Rates

Carol asks…

How do current mortgage rates help new home builders?

I’d like to buy new construction as a result of the great mortgage rates right now. However, by the time I’d close on my house in December, it could be a totally different ballgame and rates could go through the roof. It seems to me, then, that low mortgage rates only help people refinancing or buying an existing house.

admin answers:

Most economists predict that interest rates and home mortgage rates will remain low for some time to come. There may be some slight increases later in the year as the economy and the housing market improve but the rates are at record lows and now is the perfect time to buy a new home.

Have you spoken with a lender? It is possible to lock-in a rate for a small fee and thereby guarantee that you will not see substantial increases.

Donald asks…

Why do mortgage rates keep going up after the Fed lowers their interest rate?

We’re in the market for a house, and it would seem that the lowering Fed rate would trickle down to the mortgage business. Instead, those rates keep going UP! How do they expect people to help out the economy by buying homes when they keep making it so unattainable and unattractive?

admin answers:

Mortgage rates are not driven by fed rates. They are driven by the bond market, which competes with mortgage backed securities for capital. Investors need to buy the mortgages from the originators, and the rates are determined by their pricing models.

As a previous poster noted, mortgage rates follow the 10 year treasury most closely. The spread between the 10 year and mortgage rates has been increasing due to increased fears of inflation (which the fed cuts make even worse) and the general perceived riskiness in the mortgage market (forclosure rate?). As such, investors are saying they’d rather invest in other securities because the rates are not paying them enough for the risk they are taking. That is why rates sometimes go up when the fed cuts.

Mandy asks…

What are the current mortgage rates like and are there any signs of the mortgage rates changing soon?

I’m looking to get the best current mortgage rates available because me and my wife are looking for our first home purchase. Can anyone point me in the right direction?

admin answers:

There is no such thing as a standard rate as there was 20 and 30 years ago. The rate you get depends on your credit rating, the type of loan you want, the down payment you put down, the points you pay up front to buy the rate down and other things.

The very best thing you can do is ask friends and family that have gotten mortgages recently and is happy with the service. Even large mortgage companies have crooks working for them- use someone local, competent, and recommended. The rates are very similar between companies because they are all getting their money form the same source.
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I think that rates will remain low for a while. But when we start recovering from this recession I think inflation will jump quickly and the mortgage rates will also.

Jenny asks…

What is the best way to shop for mortgage rates?

I have been pre-approved by a local very large bank known for their mortgages of which I am a customer. I know the lender.

Once my short sale is approved I will get my first rate & points from him. Then is it best to shop on the internet or go in person to other banks? Do credit unions or online mortgage companies offer better rates and less points than nationally known banks?
Very good suggestions. Thank you all for your ideas.

admin answers:

Generally credit unions offer very good rates because they are non-profits so they have lower costs. I particularly like the Navy Federal credit union and the Pentagon Federal Credit Union.

The first thing to do is to get your credit report for free at www.annualcreditreport.com and check what is on there to make sure your report is accurate. If it is not, and there are negative items on there, get those cleaned up.

If you are a first time homebuyer, check on www.hud.gov or at the department of housing in your city or county to see if there are any special deals for first time homebuyers. I got a mortgage under something called a “mortgage credit certificate” that saved me 20% off of the interest costs.

If that doesn’t work, try to do all your rate shopping within a 2 week period of time, so it has the least effect on your credit score.

There is a “homebuying for dummies” book you can get at your library that has pretty good advice on how to shop for a mortgage. The biggest thing is to make sure you compare APR (annual percentage rate) not just the rate quoted, because sometimes a low rate comes with huge amounts of fees and points, and they offset the low rate.

Mark asks…

How does the unemployment rate affect mortgage rates?

from regression analysis I found that there is a strong positive relationship between the unemployment rate and mortgage rates. I can’t figure out why. Any thoughts?

admin answers:

You need to be careful, mortgage rates are prospective rates and unemployment data is retrospective data. Data collected at time t may in fact reflect time t-1 and forward rates at time t+359. Further, the mortgage market has itself changed over time being deposit funded and insurance reserve funded twenty years ago and mutual fund owned today. That creates different owners with different liabilities.

Finally, time series regressions are very difficult to do correctly. It is an entire field in itself.

Unemployment is related to bond prices because higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices, so there should be a positive relationship with prices but a negative relation with rates. However, a mortgage could be thought of as 360 forward obligations and the current unemployment level does not reflect future beliefs about the economy in a direct manner.

If you find a positive correlation that is very strong, there is also a possibility that you have a unit root problem and your t-tests are misspecified. The significance could be spurious. It partly depends upon whether the relationship is stationary or not. If you are running your tests using an ordinary statistics package, it is likely your correlation method is invalid.

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