Wednesday, January 7, 2009

At Any Rate (revised)

Back in July, I expressed my frustrations over the volatility of interest rates. In particular, this was a problem with offers on bank owned homes and short sales because the negotiations and contract periods were so long, it posed considerable interest rate risk.

Being the incredibly risk averse person that I am, I was anxious to lock in a rate as soon as possible for our current contract. I was almost giddy yesterday after talking with the builder's lender. They offered surprisingly competitive rates (I thought it would be a bit of a shell game to offset the financing incentive they offered...i.e. they charge lots of points, to get you to a normal market rate). However, we locked in a rate of 4.75% which is a full .5% less than what I had budgeted for! (I checked with a broker friend,, and the Mortgage Professor to see if the rates were reasonable.)

Those in the know, speculate that rates will continue to go down as the government becomes more involved in the market (they actually started buying bonds on Monday), or as new programs aimed at reviving the ailing housing market are implemented. However, at the same time, I am nervous that the stimulus package, soon to be unveiled, will include provisions the mortgage industry and investors will not be happy with (cram-downs etc.). This has the potential to push rates in the opposite direction.

The uncertainty on both sides, coupled with the year's track record of volatility, was a strong incentive for me to lock in a rate. We are not ones to hold out or bicker over marginal gains. 4.75% is a fantastic rate given historical data. In fact, this rate is even better than what we had on our home in D.C., and that was a 20 yr fixed loan at 5%.

If anyone has advise on mortgages/financing/closing etc., now is the time. I am relatively clueless regarding this stage of the home buying process. For instance the whole points thing, is still a bit confusing to me (i.e. how much interest rate 1 point buys). Mr. Mortgage seems to favor them if you hold the home for over 4 years, and with the builder paying our closing costs, they seem like a no-brainer (our quote includes 1.25 points...I didn't even know you could partially point).


anon1137 said...

I do not recommend paying points to reduce your mortgage rate. If mortgage rates go down, just refi, (again using a 0-points loan). The whole concept of paying points to reduce the loan rate is intended to get people into homes they can't afford in the first place.

To manage the process of getting a mortgage, you need to understand how mortgage brokers are compensated and you can look this up on the web. In short, they make money on the spread between the rate they give you and the wholesale rate. If you can find a broker who will disclose the wholesale rate on the day you lock, that takes some of the potential for fraud away from him. Getting a mortgage is a lot like buying a new car.

Husmanen said...

Were you able to negotiate with the builder to reduce the Mello Roos? I believe for this model it is around $250/month for 20 years.

Also, I used your mortgage rate calculations and your rate has changed my calculations by about $150 per month. Not bad.

RV6Flyer said...

My thought is never use a mortgage broker. Go directly to the banks. Show them a printout of your credit score and bank statements to show that you are indeed qualified, and they should be able to tell you exact pricing. It may take a little leg work, but you will save money. Ask for a bank's wealth management or private client services mortgage lender--they usually have more pricing power.
Even if a broker tells you they can get you the wholesale rate, they will probably charge you a brokers fee, plus get the rebate back from the lender. If they charge you above wholesale and charge a fee, you are being taken for a ride.

Also, I am currently refinancing and am paying half a point. I also get a free point for being a bank employee, but in all it did get me a 4.5% rate for 30 years which I will be very happy with even if rates go to 4.25 or whatever. I plan on staying in the house for a long time, so a couple of thousand bucks up front saves me many thousands over 30 years.
Just got the appraisal back, I have made 7% since I purchased last March. Shows the appraisers still don't have a clue. Should I take the cash out and buy a new boat and take a trip around the world?

Buying Time said...

No, I didn't try to negotiate the Mello Roos down. I probably should have asked.

However we are getting 15k toward closing if we use their lender (hence, paying points, would not be an out of pocket expense for us).

"I have made 7% since I purchased last March" Based on your earlier comment, I would say go and get your IFR certification instead of a boat =) Or a roadable aircraft ( for when you can't fly VFR. It would be perfect if you lived in one of the hanger homes near the Cameron Park Airport.

RV6Flyer said...

"However we are getting 15k toward closing if we use their lender (hence, paying points, would not be an out of pocket expense for us). "

Yeah, hard to beat that offer.

Sold in '05 said...

"My thought is never use a mortgage broker. Go directly to the banks."

Right on RV6. Mortgage brokers are like paying an extra car salesman to go negotiate with the car salesman at the dealership. You're adding an unnecessary middleman and his markup. Plus a bank won't jerk you around, either they're lending you the money or they're not and you can move on down the road.


Buying Time said...

"You're adding an unnecessary middleman and his markup."

I have always wondered about this, but I figured I was missing something, and uninformed, as there are so many brokers, and they dominate the loan business.

Jacob said...

4.75% seems really good. If rates go down to 4.25% or even to 4% or below you can just try and refi. And if rates go up you are locked in at a historically low rate.

In 10 or 15 years the bank may be offering you incentives to pay it off sooner.

I wonder what would have happened if you told the builder to buy back the mello roos or no deal.