At first this may seem like an audacious idea, a violation somehow of the free market absolutism preferred by so many businesses and industries — at least until they need a special rule, tax break or handout from Uncle Sam.

In fact, it was not too long ago that Uncle Sam actually set mortgage rates for government-insured loans. For instance:

• Until November 30, 1983 HUD set interest rates for FHA mortgages. The practice ended with passage of the Housing and Rural Recovery Act of 1983.
• Under the Veterans Home Loan Program Amendments of 1992, the VA is allowed to set the maximum interest rate that can be charged for a VA loan as well as the maximum number of points. Today, the VA still has the right to set mortgage rates for vets but has elected not to do so.

Imagine what would happen if the government set daily mortgage rates for FHA and VA loans. Each day at 9 AM the daily rate would be made available online. Every borrower would have an opportunity to see the available rate for qualifying borrowers. Borrowers could compare the FHA and VA rates with rates for conventional financing — meaning there would be no need to set conventional interest levels, though if we wanted that could also by done through the Federal Housing Finance Agency.

The rates would be show at “par” — meaning with zero points — and with points so that borrowers could see a number of rate-and-point combinations. For instance, today a loan might be at:

• 3.75 percent and 1 point.
• 4 percent and 0 point (par pricing)
• 4.25 and -1 point (borrower gets a cash credit at closing or lender pays some or all closing costs).

In a marketplace filled with openness and clarity borrowers would have more of a chance of getting a fair deal.

Alternatively, we could go back to 2006.

The Wall Street Journal says in 2006 that 61 percent of all subprime loans originated that year went to borrowers who actually qualified for FHA, VA and conventional mortgages. Think how much borrowers could have saved if only they had known their real financial position. Think how many foreclosures could have been prevented. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007).

And while lenders might object to HUD and the VA setting rates for their insured loan products, they certainly have not complained with new rules which have benefitted mortgage companies.

For instance,  HUD limits on lender fees for FHA borrowers were ended in November 2008 — just two weeks after the presidential election. The Bush Administration said it decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

While many lenders have acted fairly and in good faith, some have not. That’s why better regulation is needed and that’s why the government should publish daily loan rates that anyone with Internet access can see.

Should Government Set Mortgage Rates? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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There is also an origination fee and, often, also one or more points.

The origination fee is a charge to compensate the lender for his or her work, typically an amount equal to 1 percent of the loan.

A full point is equal to 1 percent of the loan. In rough terms, if you pay 1 point at closing the cost of a 30-year mortgage will increase by 3/8ths of a percent over the life of a loan.

For instance, if you borrow $250,000 at 5 percent and pay 1 point at closing, the real interest cost for the loan over 30 years is roughly 5.36 percent. Note that 1 percent at closing is equal to $2,500 in this example.

The confusion comes when the lender says, “well, would you like to refinance at 5.36 percent and 0 points or 5 percent and 1 point? Or, we can finance your closing costs if you will pay 5.5% percent so you will have a no-cost refinance?

Huh?

To start, a loan with 0 points is called par pricing. It’s smart to always ask for loan quotes with zero points because that gives you a way to compare rates.

With the lender’s offer, here are some, er, points to consider.

1. Points are paid in cash at closing. Generally they can be financed in the form of a higher loan amount.
2. Interest rates with points are calculated over 30 years in the case of a 30-year mortgage, 15 years with 15-year loans, etc. The catch is that you might not live in a property for 30 years. In fact, the odds are overwhelming that you will sell or refinance long before 30 years (just think how often people move).
3. If you sell or refinance before the loan term is up then your effective interest rate will increase. Why? Because you paid a set amount up front — say $2,500 for a $250,000 mortgage with 1 point — but the loan didn’t last 30 years. Once the money is paid it’s gone — there are no refunds.
4. In reality, there’s no such thing as a “no cost” mortgage. Like a unicorn, it’s a rumor. Borrowers always pay. With so-called no cost financing the lender pays some or all closing expenses in return for a a higher rate. Given your credit standing and the premium interest rate, the lender can sell the note on the secondary market for additional money, thus getting back the closing costs plus (hopefully) a profit.
5. If you’re refinancing it can pay to get a no-cost mortgage as long as your new monthly cost for principal and interest is lower than then current cost.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act lenders can no longer charge a yield-spread premium or YSP by up-selling a loan with a higher rate or more points.

Should I Pay More Points For A Lower Mortgage Rate? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Conventional Mortgages

FHA Mortgages

Jumbo Mortgages

VA Mortgages

Go to any of these links and you’ll see that Google generates a search for the type of mortgage you want and that at the top of the page is a yellowish area with a compare rates button. Press the magic button and you get a list of mortgage offers which can be localized for your community.

You can arrange the ads by monthly payment, APR, interest rates, lender fees and lender names. The best strategy is to set the “points” option on the right to zero so see you can see par pricing, the real interest rate without points. This makes comparing loans easy.

Once you have your table set up look for the lowest rate AND the lowest fee level. For instance, with conventional financing I see at this writing that one lender is offering financing at 5.353 percent and $6,140 in fees. Another offers the same loan for 5.297 percent plus fees worth $4,952. While the APRs and lender costs differ, the nominal interest rate for both loans is 4.875 percent and the monthly payments are identical.

Picking A Lender

I very much like the idea of visible, uniform mortgage comparisons. That said, there are concerns with the Google system.

First, the Google system is only open to advertisers and there’s no stone tablet which says advertising lenders always have better rates than lenders who do not advertise.

Second, I do not see lenders at this writing who I think of as being local. I do see at least one lender who by name must be 1,000 miles from my location.

Third, advertised mortgage rates whether online or in a newspaper are, well, the best advertised rates at one point in time. Alas, rates are constantly in flux, the best rates certainly won’t be available for borrowers with weak credit and advertised rates are always subject to a number of caveats such as a check of credit and income, the value of the property, credit scores, etc. In other words, great rates and low costs may not be available to everyone — including you.

Fourth, if everyone is charging 5 percent and $2,000 in fees and someone else is offering 4.5 percent and no fees you need to wonder how that’s possible. Money is money, and while some variance of rates and fees makes sense, caution should be in order when someone has terms which are too good to be believed.

Fifth, borrowers need more information about a given loan program than just rates and costs. For instance, there’s a reason FHA mortgages are often a better deal than other loans (can we spell T-O-X-I-C financing) even if the rate is sometimes higher.

The Real Value Of The Google System

The attraction of the Google system comes in the form of consumer education and intelligence. Borrowers rely on lenders for information, program options and rates — but under federal rules lenders have no obligation to get the best rates and terms for borrowers.

In this system the lender has every advantage — but at least the Google ads provide some sense of the rates and costs available from various lenders. Armed with this information, borrowers can then check with such sources as community banks and local credit unions to see how their offers stack up.

Lastly, the Google comparison system is important if only because Google itself is so huge, so significant and so transformational. It’s an addition to the mix of options available to mortgage borrowers which should be welcomed — as should anything which makes the lending process more competitive, more open and more transparent.

Google Mortgage Ads — Do They Reduce Borrower Costs? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: advertising, APR, comparison, conventional, FHA, Google, interest, jumbo, loan, mortgage, par, points, tool, VA

___ “The average contract interest rate for 30-year fixed-rate mortgages increased to 5.25 percent from 4.81 percent, with points decreasing to 1.02 from 1.28 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The 44 basis point increase in the 30-year rate was the largest since a 48 basis point increase in October 2008.”

___ “The average contract interest rate for 15-year fixed-rate mortgages increased to 4.8 percent from 4.44 percent, with points decreasing to 1.10 from 1.16 (including the origination fee) for 80 percent LTV loans.”

___ “The average contract interest rate for one-year ARMs increased to 6.61 percent from 6.55 percent, with points increasing to 0.15 from 0.12 (including the origination fee) for 80 percent LTV loans.”

Interest Rate Rise Examined

If you look at these numbers carefully you can see three things: First, rates for the week are plaining on the increase. Second, what happens in a week is not a trend. Third, the rate increase is not as steep as it seems.

Let’s take a look at 30-year fixed rate loans.

We went from 4.81 percent with 1.28 percent to 5.25 percent with 1.02 points. A point is equal to 1 percent of the mortgage amount so for a $100,000 the cost of one point would be $1,000.

Notice that interest rates went up but points went down.

Apples To Apples

To compare apples to apples, let’s convert those points into interest rates. The usual equation is that one points equals one-eighth of a percent (.125) over 30-years. (Most mortgages, of course, do not last 30 years, which means the effective interest rate for one point is higher than .125 percent.)

To start we have 4.81 percent plus 1.28 points. Convert the points (1.28 x .125) to interest and we get .16 percent. Add 4.81 percent and .16 for a par rate of 4.97 percent. (Par is the interest rate with no points.)

The new rate is 5.25 percent plus 1.02 points. We convert the points (1.02 percent x .125) to interest and we get .1275 percent. Combine the interest rate (5.25 percent) plus the value for points (.1275 percent) and the new rate at par is 5.3775.

The Real Rate

In reality, we went from 4.97 percent to 5.3775 percent at par for fixed-rate loans. That’s a difference of .4074 percent — in a week.

Don’t panic — let’s see what happens in a few weeks. But we could be seeing the end of historically-low rates in exchange for rates that are close to historically low. That still isn’t bad.

Interest Rates Rise Suddenly, Say Mortgage Bankers is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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One catch is that loans do not normally last as long as projected.

As an example, when points are paid, they are undervalued if APR calculations are based on a 30-year loan term but the mortgage ends in 10 or 12 years because the home is sold or the property refinanced. If a loan has an 8-percent interest rate with 2 points over 30 years, the APR would be 8.21 percent. If the loan only lasts 10 years, the APR would be 8.45 percent.

Another catch is that the APR does not include prepayment penalties, potentially thousands of dollars if the loan is paid off or refinanced during the prepayment period.

But, in an imperfect world, the APR is probably the best general measure we have to evaluate loan costs. At the very least, borrowers should review APRs when comparing loan alternatives.

In addition to the APR, always get loan quotes at “par” — the interest rate with 0 points.

What’s The “APR?” is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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In general terms, more points mean a lower interest rate, fewer points can mean a higher interest rate. The reason is that points are really a form of prepaid interest — instead of paying over time in the form of a higher rate, consumer can points pay up front. A loan without any points is priced at “par.”

Because rates and point combinations are often hard to compare, borrowers should look at par pricing — the annual percentage rate with 0 points — to get an idea of loan costs.

What’s A Mortgage “Point?” is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The reason that interest at par is higher than interest with points is that points are merely a form of prepaid interest. If you work the numbers over a 30-year period the cost of both loans is largely the same.

While both points and monthly interest costs are likely to be fully deductible, most people do not keep loans for 30 years. If the borrower in this example sells or refinances after 10 years, the effective rate for the note with points will be higher than 6.75 percent.

Lenders routinely have a series of rates and points for each loan product. For instance:

•  6.5 percent plus 2 points

•  6.75 percent plus 1 point

•  7 percent plus 0 points

•  7.25 percent minus 1 point

•  7.50 percent minus 2 points

So, if you want a loan at 6.5 percent, you would need to pay 2 points at closing in this example. If a loan at 7.50 is acceptable, then you would get a credit from the lender at closing equal to 2 points — 2 percent of the loan amount.

When lenders tell you that they will pay some or all of your closing costs in exchange for a higher interest rate, all they’re doing is getting an interest rate above par.

Do higher rates make sense? In many cases, yes. The logic is that points paid at closing is cash gone forever, even if you only own the home for a short period of time, say less than five years.

When comparing rates, it’s always a good idea to ask lenders for par pricing — and then ask for alternative rate and point combinations.

What is “par” pricing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Why is this argument incorrect? Because loans rarely last 30 years. They are typically paid off in eight to 12 years because homes are sold and loans are re-financed or paid-off.

This means that to reduce an interest rate 1 percent you are likely to pay substantially less than 8 points up front. How much less depends on your bargaining skills — at the very least speak with an array of lenders, ask them to give you a loan quote at “par,” and let them compete for your business.

How many points must one pay to reduce an interest rate 1 percentage point? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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