Rate Cuts!

A little bit more info on mortgage rates & how rate cuts impact them.

So many times in the news you hear that the Federal Reserve has cut interest rates. Shortly thereafter clients begin calling and ask me how much the interest rates on mortgages have dropped.

First point, the Fed rate is the rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate. So what does this mean? Very simply when the Fed Rate drops the interest rate at which banks borrow money drops as well. Therefore when the Fed’s cut rates the banks can borrow money cheaper.

Now the real measure of how interest rate will change with respect to mortgage rates is the yield on the 10-yr Treasury Bonds. When these bonds go up the yield goes down (it is an inverse relationship for those of you who understand some basic mathematical principles). When the yield drops the rates on mortgages generally drop. One thing I would like to point out from my observation of the markets, sometimes the Fed cuts rates and the stock market begins to rally. This rally brings the prices of stocks up and people begin to sell bonds. When the price of bonds begins to drop their yields go up and as a result the interest rate on mortgages goes up as well. I have also seen times when the Fed has cut rates and the interest rates on mortgages have dropped. So how do I know if interest rates will drop? The general rule is to track the yield on the 10 yr treasury bonds and if I really knew how to track bonds each day maybe I would be a bond trader on Wall Street.

Dirty Rotten Scoundrels...

Also known as mortgage brokers...

I found an interesting article online discussing mortgage brokers on cnnmoney.com today. Here is an overview.

"A good one (mortgage broker) can save you time & thousands of dollars over the life of a loan."

"It's up to you to understand the loans you're being offered and the fees involved."

Key Questions:

Do I need a broker?
-Do you understand mortgage products? 30 fixed, 2/28, 3/27, IO
-Do you know where rates are right now? 30 fixed, short term
Brokers can help. They have access to wholesale rate sheets from many banks & have the time to shop rates. Afterall, its their job.

Who can I trust?
Find out the following:
-How much does the broker stand to make on your loan?
-How will the broker make money (Fees &/or yield spread premium)
-If you don't feel comfortable, talk to another broker!

Am I getting a fair deal?
-$0 application fees. ONLY appraisal ($350) & credit ($13 - $25) should be charged in advance. That being said, these fees should not be required to complete an application.
-What are the pros & cons of at least 3 different types of loans
-Understand terms of loan (rate, fixed or adjustable, prepay, margin, rate cap, etc)
-The broker should be able to guarantee fees once the loan is locked.
-Request paperwork (a copy of the HUD-1) before closing & compare them with the good faith estimate

http://money.cnn.com/2007/07/24/real_estate/salesman_factor.moneymag/index.htm

Fed Rate Cut = Higher Mortgage Rates?

Yes! (Well this time anyway.) Why? Mortgage rates follow the bond market, not short term interest rates. Mortgage rates are also influenced by inflation concerns.

http://www.bankrate.com/nltrack/news/mtga/Dec1307_mortgage_analysisa1.asp?ec_id=brmint_ns_mortgage_20071213

So do rate cuts affect mortgage rates? Sometimes....