The Industry Report

The Economics of Interest Rates & How They Work

[Note: this is a re-post from an article earlier this year.]
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Now we all know that mortgage interest rates fluctuate daily! But here's why and how it works...

Stocks and Bonds compete for the same investment dollar. This means that investors can choose to invest their money in the Bond Market or they can choose to invest their money in the Stock Market.

When the economy is doing bad, it creates negative consumer sentiment; or in this case, negative investor sentiment. So in the face of negative economic news, such as a poor Jobs Report for example, investors look for a safe harbor; in this case Bonds!

Since there now exists additional money being invested into these vehicles (Bonds via Mortgage-Backed Securities), interest rates no longer need to be as high in order to attract the investment (in other words, rates don't need to be sold at a higher premium, a.k.a. higher rate, to attract investors). Thus, INTEREST RATES ARE LOWER and Lenders see better pricing on their rate sheets!

So although bad economic news seems contradictory, we're all almost silently rooting for a slightly bad economy as in translates to greater purchasing power by way of lower interest rates.

My guess is you're wondering, or rather hoping, that rates will remain low as we move on ahead. Am I right?

Well, if you're wondering what daily mortgage rates look like, stay tuned! Come back to visit the "Daily Mortgage Update" section here on The Industry Report

Why People Hate Their Mortgage

Do you know why most people hate their mortgage?

It's because they know that over the life of that 30-year loan, they will have spent more in interest than the house cost them in the first place!

So what's a soon-to-be homeowner and an existing homeowner to do?

A bigger down payment upon purchase is always an option,

So is making additional monthly principal payments...

and then there's a 3rd option for those who subscribe to the Missed Fortune philosophy of accumulating wealth,

Invest your otherwise additional monthly payments in an interest baring account whose rate-of-return is higher than the interest paid on your mortgage. Essentially, you accumulate enough assets to pay of your mortgage in fewer than 30, even 20 years...

Now some will argue with what I'm about to say next... Ultimately, no one way is better than the other. What's really important is, which method brings you greater piece of mind?

[Flickr Photo by: The Trusty Yak]

"Did you sign a Buyer's Brokerage Agreement?"

When you're a Real Estate Agent, you dream of having a Pre-Approved Borrower with a Buyer's Brokerage Agreement every time someone hops into that SUV. It'd be the perfect client every time!

But alas, you live in the "real world" where no one is approved for fear of running & ruining their credit report and no one wants to sign a Buyer's Brokerage Agreement; they're just not ready for that type of commitment. You know, they wanna test the water (so-to-speak) to see if there's anything out there to buy to begin with (something that's within their budget and appealing enough to call "home").

If you're a Real Estate Agent, where do you draw the line? When do you say, "no mas! I won't show you a home without a Buyer's Brokerage Agreement.

If you're the consumer, why won't you ante up? You can be honest...this blog has an "open door" policy.

I point this out because a fellow Agent and friend of mine [let's call him Agent Chuck] was working with some very close clients of his [let's say Mr. & Mrs. Smith]. Well, Agent Chuck went on vacation over the weekend; a much needed vacation. I can't blame him, he works very hard. He should get a few days off to spend with his family.

Anyway, whilst he was on vacation Mr. and Mrs. Smith found a home that they really liked. Being loyal to Agent Chuck they told the Showing Agent that they were already working with Agent Chuck.

That's when Mr. Showing Agent asked Mr. and Mrs. Smith if they'd signed a Buyer's Brokerage Agreement to which they responded "No." He proceeded to say "if you use me, I'll cut my commission in half." How's that for a discount huh? Well, not really...

See, what really happened was this... The showing agent wrote up an offer for Mr. and Mrs. Smith on the property and on a 6% commission. There was no price reduction on the sale of the home and no seller concessions to cover closing costs. Good ol' Mr. Showing Agent just doubled his commission by working the buying and selling side on this transaction. Meanwhile Agent Chuck is telling his ex-clients "the seller pays the commission. I'm not charging you a dime!" (Too little, too late).

The Big Question:

When do you make it a rule for yourself to not represent buyers without a Buyer's Brokerage Agreement?

Not All Debt Is Bad!

It's easy to say that all debt is bad.

I mean really, who wants to owe money?

No one does!

A point perhaps that we learn at an early age. Don't acquire too much debt, it'll ruin your credit!

But you know...not all debt is bad! A point investing in Real Estate has taught us (at least some of us anyway). I'll refer to Investor and REALTOR® Benjamin Bach over at Agent Genius for a little more emphasis where he tells us,

“Only borrow money to pay for things that increase in value” - Seth

Like Real Estate for example. Where many an investor has bought low and sold high using other people's money (a.k.a. financing via a mortgage).    

People will often subscribe to one of two schools of thought here:

1. Pay off your mortgage debt as soon as possible, and
2. Leverage your mortgage to the hilt and use it to accumulate wealth via a side-fund

I'm not going to argue whether one is better than the other because frankly, every one is different. Some people like the Mortgage Accelerator Program, other's don't. One isn't better than the other. I guess what I'm saying is that mortgage debt helped you buy the home in the first place. That mortgage debt was tax deductible at the end of the year... That mortgage debt is a good debt!

Don't you think?

"What's your rate?"

You're busy, I get it.

Between getting ready for work in the morning...

making sure your clothes is ironed...you have the right tie...making breakfast...getting the kids ready for school & packing their lunch...driving them...and managing to get to work on time...

...to making it home on time to prepare for dinner, helping your kids with their homework and sharing a glass of wine with your wife at the end of the day...

When do you find the time to talk about your mortgage for 10 - 15 minutes? (Your interest rate has just adjusted. You need to refinance. You just  don't have the time to talk about it all). So what do you do? You call a lender and the first thing you ask is:

"What's your rate?"

Fine. It's a valid question. BUT, have you ever turned on the shower-head and just jumped right in? The water's cold isn't it? Of course it is, you haven't let it warm up yet. In Spanish our parents used to tell us, "deja que se ponga tivia"; translation = "let it warm up." There's nothing worse than the sting of ice-cold water in the morning.

When shopping for your mortgage, I know you're in a hurry to jump right in and ask "what's your rate?" to arrive at the lowest quote. But I'll tell ya, and so will many others, there's nothing worse than the cold hard sting of getting ripped off by a predatory lender. The person that answers you straight off without asking any questions. The kind that promises you:

5.5%, 30-year fixed, no closing costs, no pre-payment penalty...

You know, the person that mis-represents the Good Faith Estimate and comes to the closing table with something completely and utterly different (higher costs & a higher interest rate...with a solid 3-year pre-payment penalty). The person that tells you what you want to hear without analyzing any of the qualifying factors:

Your Credit Report & Credit History

Your Income (to determine your Debt-to-Income Ratio), and

Your Equity (to determine your Loan-to-Value)

They tell you to slow down, wait a minute and let the water get warm so it feels better when you jump in to shower. We (lenders) tell you to slow down and go through the 10 - 15 minute pre-approval process because it will feel better when you know you got a mortgage that's right for you and that's a genuine representation of what you qualify for in today's market. After all, this sure beats the "low-rate" selling point alternative that comes back to bite you in the rear at closing. Doesn't it?

My name is Ricardo Bueno. I'm a mortgage professional based out of California. If you want to get pre-approved for a mortgage loan (purchase or refinance) you can contact me directly at (323) 810-2175 or via e-mail at ricardo (at) ricardobueno (dot) com Or, you can also apply online here.

Should you break the piggy bank to pay your mortgage?

This article from Market Watch, a part of a question and answers segment, gives you some great food for thought.

Would I recommend liquidating your retirement savings to pay off your mortgage? No. Then again, each circumstance is different. I'll give you an example...

A client of mine has a 6.25% 10-year interest only first mortgage and a 10.25% fixed rate second mortgage. Ideally she'd like to consolidate both mortgages into a single 30-year fixed rate mortgage. Unfortunately however, she's upside down on her mortgage (she owes more than the property is worth in today's current real estate market).

She'd considered using her retirement savings to pay down the principal balance and closing costs in order to achieve this. Understandably piece of mind is great but that's all that she would have accomplished here at the cost of wiping out her entire retirement savings. The reality of the situation is, she earns a sufficient enough income to meet her mortgage payment obligations at the end of each month while still having room to send in several hundred more.

So does it make sense for her to break the piggy bank to pay off her mortgage? Clearly the answer is no! I sent her an amortization schedule that shows her what her payments would be on a 30-year fixed rate mortgage and she makes that payment each month so she's effectively paying down her principal balance every time she makes a payment. (If you'd like me to prepare a free payment schedule for you that shows you how to pay off your mortgage in fewer years, contact me here or call me at 323.810.2175).

"But wait a minute, what if I'm buying a home? Is it "ok" to use my retirement savings then? I'd consider Gift Money as a form of down payment first.

Origin of the Word "Mortgage"

When you're buying a home, you either 1.) pay cash or 2.) you apply for a mortgage. Of course there's a mix of the two like a 10 - 20% down payment and you finance the rest.

Well, the definition of a mortgage is:

"the pledging of a property to a lender as a security for a mortgage loan." [Source: Wikipedia]

But you already knew that right!?

What you didn't know is that in Latin, mori (from the Old French word mort-) means "death" and -gage means "pledge". Thus the words: "death pledge".

How's that for asking for a mortgage!? Thank goodness we don't take things so seriously!

The Origin of Credit

[Note: this article was honorably mentioned in the Carnival of Personal Finance here.]

Did you know that Arthur Morris is the man responsible for creating the installment loan in (or around) 1910?

It was called the Morris Plan (clever name huh) and it was the first stab at making credit available to the average person despite heavy criticism that lending money to working class citizens had failure written all over it.

And yet the American economy today is built on credit!

Back then, the lending requirements were as follows:

• You needed two co-signers in order to qualify
• The loan term was set to 1 year
• Payments were made in weekly and monthly installments

Boy how things have changed since then.

 

[When the Consumer Says] I Didn't Know...

• I had a pre-payment penalty
• I had an adjustable rate mortgage, (or worse yet)
• I had a negative amortization (Neg. Am) loan
• I had to pay my taxes separately. I thought they were included in my monthly payment (an impound account)
• My closing costs were rolled into the new loan balance
• I had the option for lender-paid mortgage insurance
• I could Lock-In my rate during the application process
• I could use Gift Money as a source for down-payment
• I have three different credit scores (Equifax, Experian and Transunion)
• I could pay points to buy-down my mortgage rate, or better yet, that Seller Concessions could be used towards buying down my mortgage rate
  

As a consumer, do you ever feel like you fit into one of these categories?

To be better prepared/more informed, all you have to do is pay attention to what you're committing to on paper and ask yourself whether it makes sense for you. This includes reading the fine print and asking questions where necessary. If you're not getting any answers, you're probably working with the wrong professional.

Why the rant?

Because the Federal Trade Commission conducted a study for the Federal Reserve wherein the following results were obtained:

"Of those surveyed, 25% could not identify the annual percentage rate of their mortgage, and 25% could not identify the amount of settlement charges. Half could not correctly identify the amount of the loan. Two-thirds were unaware of prepayment penalties that could be charged during refinancing. Three-quarters did not recognize that the loans included charges for optional credit insurance." [Source: Forbes.com]

So, if you have a question or there is something that you're unsure of, ask me or tell me about it here.

Early Loan Payoff!

Even with today's low interest rates, the total amount of interest that you may pay over the life of your mortgage can seem like an enormous amount. In fact, that's one of the reasons so many people set a goal to pay down their mortgages early. Should you bet setting that same goal? Well, here are some reasons to consider it:

• Paying your mortgage off may make you completely debt free.
• You might want to reduce expenses as much as possible in order to put more money into your retirement fund.
• You live in a country, such as Canada, where you do not receive a tax break just because you carry a mortgage.
• You pay for Private Mortgage Insurance (a.k.a. PMI). If you have less than 20 percent equity in your home, making extra payments will help you build more equity sooner thereby allowing you to cancel your PMI. Eliminating PMI will then reduce your monthly payments.

For some on the other hand, paying off your mortgage early can hurt you more than it helps. For example, here are some reasons you might want to forego pre-paying your mortgage:

• Your mortgage contract includes a prepayment penalty. (I don't think anyone likes the idea of paying thousands in prepayment penalties).
• You have other high-cost debts such as Credit Card interest rates. Such rates are often more than twice that of most mortgages. (Any extra cash that you have should go towards paying off those balances first).

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Now there's often two schools of thought here:

The first subscribes to the principles taught in "Missed Fortune" by Doulgas R. Andrew and how you should leverage your home equity to build wealth, whilst

The second advocates being debt free period (the sooner the better).

I won't argue whether one approach is better than the other because the fact is, it varies from person to person. Some individuals for example might derive a tremendous amount of piece-of-mind (and that's very important) in paying off their debt in it's entirety whilst others might be readily willing to accept and engage in the principles of leveraged equity. There's no right or wrong, it's just a matter of finding which approach works best for you.

So, what's your philosophy?