Ask a Mortgage Broker

With the Fed rate cuts, why are we seeing higher mortgage rates?

2008-03-19T07:59:00.000-07:00

With the recent Fed action to cut rates again, we could be sure to see a drop in mortgage rates, right? Wrong. In reality, 30 year fixed rates are higher than they have been in a while.

The reason for this is the Fed's rate cut is on the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide. Inflation also drives long-term fixed rates.

Typically, mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%. But with the housing market in such a mess right now, the rates are even higher. Lenders are more concerned than ever that borrowers will not be able to pay back loans. Until banks are willing to lend again, we will continue to see the higher rates.

What is APR?

2007-12-27T13:01:00.000-08:00

APR can be very confusing to the typical consumer. APR is Annual Percentage Rate. APR is calculated by taking the Note Rate and including other fees associated with the loan. The APR is designed to show the "true cost of the loan". Unfortunately, even though this calculation is required by regulators, not every lender calculates it in the same way. Also, most lenders rely on software to do the calculation for them. And every software program has a different set of parameters. This does not cause a large discrepancy, but enough that it could be a problem.

The following fees ARE generally included in the APR:

Points - both discount points and origination points
Pre-paid interest- The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
Loan-processing fee
Underwriting fee
Document-preparation fee
Private mortgage-insurance

The following fees are SOMETIMES included in the APR:

Loan-application fee
Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are normally NOT included in the APR:

Title or abstract fee
Escrow fee
Attorney fee
Notary fee
Document preparation (charged by the closing agent)
Home-inspection fees
Recording fee
Transfer taxes
Credit report
Appraisal fee

The best way to compare lenders by their APR is to get a Good Faith Estimate from everyone you are considering using for your mortgage needs. Compare the fees for each lender removing from the equation any fees you know will not be used in calculating APR. Also, remove any amounts for insurance and taxes as these will also not be used to calculate APR. You should go with the lender or broker that gives you the lowest possible fees with the best rate.

If you have any questions, please don't hesitate to comment. We would be glad to help!

APR Calculator

Four Questions

2007-11-20T08:04:00.000-08:00

There are four questions you should ask your mortgage broker. If he/she cannot answer these questions to your satisfaction, you should look elsewhere for your mortgage needs.

1. Can I get references?
You should be able to get references of customers that were satisfied with your broker's service. Two to three names and numbers shouldn't be difficult.

2. How long have you been in business?
There's nothing wrong with using a new broker. But many new brokers did not start until business was booming in the last couple of years. A broker that has been in business at least three years would have a better understanding of the market.

3. How are you compensated?
Brokers are compensated in several ways. The lender offers the broker a yield spread premium. This is paid by the lender to offer a slightly higher rate to the borrower. If a broker gives the borrower a lower rate, usually the borrower will pay the broker points or fees to compensate. An honest broker will disclose exactly how this fee will be paid. Always ask for a Good Faith Estimate.

4. How do you handle rate locks?
Some brokers will let a rate "float" hoping the market will come down thus giving them a higher payout. An honest broker will tell you he/she is locking your rate and will do it that day. Typically, rates can be locked anywhere from 15 days to 60 days.

If you have questions, please comment. We would love to hear from you!

First Posting

2007-11-12T10:42:00.000-08:00

This blog is intended to answer your questions. Please feel free to leave a comment with your questions. Do you have questions about the difference between an ARM and a fixed rate? Do you want to know about Yield Spread Premium? What exactly is APR? These are the questions we would like to answer for you in an honest manner.
Please let us know if there is anything we can help you understand in this volatile market.