Actually, both claims are correct but the bigger issue is whether refinancing is actually worthwhile.

According to the letter my mortgage rate would drop from 4.63 percent to 4.46 percent if I refinance. That’s right, based on the APR or annual percentage rate, my rate would fall .17 percent. Not a partial .17 percent, not a fraction of .17 percent, but a full .17 percent. That’s about 1/6th of 1 percent.

But wait, there’s more.

And, yes, monthly costs would fall. For instance with a fixed-rate, 30-year $200,000 mortgage the monthly expense for principal and interest would go from $1,028.88 to $1,008.62. That’s a savings right there of $20.26 per month or $243.12 annually.

So the lender’s letter is literally true: I would have a lower interest rate and save almost $250 a year in this example.

Mortgage Rates

Despite the accuracy of the lender’s claims — which are subject to change along with the interest rate according to the letter — the offer is unacceptable to me. Here’s why.

How much would I have to spend at closing to save $250 a year? If closing costs $3,000 for transfer taxes, legal fees, title insurance and other expenses than it would take 12 years of mortgage “savings” to get back my money.

And why are mortgage rates at anywhere near 4.46 percent attractive in today’s world? The latest figures from Freddie Mac show that a typical 30-year mortgage is priced at 3.98 percent — that’s almost a half point lower than the offered rate.

Nope, I won’t be taking the lender’s offer.

But here’s the question: Why didn’t the lender simply repeat it’s last refinancing offer — an offer I took. In that case the rate went down almost a point, I saved about $200 a month and the lender paid all closing costs except prepaid taxes and insurance.

The lender and I both benefited. I got the lower monthly payment and the lender got a crisp, new loan to re-sell at a profit in the secondary market.

In other words, everybody won.

Mortgage Prepayments

The new refi offer doesn’t work because it’s one-sided — assuming the lender actually provides the terms mentioned in the letter (remember, they’re subject to change).

If I’m going to spend more money on a loan, I certainly would not pay $3,000 in closing costs to save $250 a year. Instead, I might simply increase the monthly payment by $25. While a $200,000 loan at 4.63 percent costs $1,028.88 per month, I might instead pay $1,053.88.

That would reduce the total interest bill over the loan term by nearly $10,000 — from $170,396.80 to $160,502.20 – and shorten the mortgage term by 18 months. This approach works regardless of whether the loan is an FHA, VA, or conventional fixed-rate loan. The concept also works for fixed-rate jumbo mortgages as well.

As to the lender — hey, write me again. Let’s redo the last deal at today’s rates. You know where I live.

Caution: Refinancing with Low Mortgage Rates May Not Work is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Mortgage borrowers are now seeing home loans at not much more than 4 percent for 30-year, fixed-rate mortgages. And, reports HSH.com, 15-year loans are already below 4 percent.

The lower rates result in substantially reduced monthly payments. For instance, imagine that you borrow $100,000 over 30 years and the fixed rate is 3.9 percent. Your monthly cost for principal and interest will be $471.67. The same loan at 5 percent would have a cost of $536.82 and at 6 percent the expense would rise to $599.55.

Of course, to get these terrific mortgage rates you need an income, a problem for the 16 million or so people who are unemployed or “marginally attached” to the workforce. And, certainly, no lender will give you a loan if you’ve recently been foreclosed, even if the cause of your financial distress was the lender’s “affordability” loan product that lead to your demise.

Federal Reserve

Since 2008 the government has done everything possible to save a tottering and tettering financial system, meaning big banks and brokerages on Wall Street. Part of this effort has been to knock down interest rates to levels unseen by any living human being.

For instance, the Federal Reserve has just decided to spend $400 billion to swap three-year Treasury securities for securities with a longer term, from six to 30 years. This maneuver shuffles the financial deck while not creating a single new job.

This has been great for the financial sector, which gleefully charges 29.9 percent for credit card debt while it borrows money through the Fed at near zero percent.

Taxes

There is now a serious proposal in Washington which would raise taxes on those who have benefited most from society. Some, however, oppose the idea because they feel it’s a form of “class warfare”.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

“This is not class warfare,” says President Obama. “It’s math.”

Meanwhile, major US corporations continue to generate massive profits — and pay little or no taxes.

GE, says the New York Times, “reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.”

US corporations now have some $1.5 trillion in overseas profits sitting outside our borders. This money could be used to modernize American factories and create millions of jobs but patriotic American companies will not bring the money back to the United States unless their overseas profits are taxed at just 5.25 percent.

Pensions

There is also much debate regarding the Social Security system, but little has been said about how the Fed’s efforts to help the financial sector have destroyed pensions.

Imagine that you had $2 million in retirement cash and invested it today in five-year CDs. Your likely interest rate would be roughly 1.75 percent or $2,915 a month.

But ask yourself: How many people have $2 million in retirement cash? Or $1 million? $100,000? In fact, the median amount set aside for retirement is just $45,000.

Truth is we all want interest rates that are higher than what we have today. Higher rates suggest the economy has begun to return, capital is more in demand, jobs are being created, homes are selling and savings are producing decent returns — things that help everyone, even folks not on Wall Street.

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The idea that ARM rates across the country would fall below 3 percent is stunning, proof that the country is awash in capital that essentially has nowhere to go. While it has been possible to see such low start rates in the past, they have often been associated with bait-and=switch financing that features very short start periods — say one to six months — and then vastly higher-monthly costs. Today’s rate announcement from Freddie Mac simply refers to ARM rates in general that use a Treasury index. Presumably, start rates are even lower.

• 30-year fixed-rate mortgage (FRM) averaged 4.22 percent with an average 0.7 point for the week ending September 1, 2011, matching last week when it also averaged 4.22 percent. Last year at this time, the 30-year FRM averaged 4.32 percent.
• 15-year FRM this week averaged 3.39 percent with an average 0.6 point, down from last week when it averaged 3.44 percent. A year ago at this time, the 15-year FRM averaged 3.83 percent.
• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.96 percent this week, with an average 0.6 point, down from last week when it averaged 3.07 percent. A year ago, the 5-year ARM averaged 3.54 percent.

According to Frank Nothaft, Freddie Mac’s vice president and chief economist,”Weaker economic data reports eased upward pressure on mortgage rates this week and kept them at or near all-time record lows. The economy grew at a slower rate of 1 percent in the second quarter than was originally reported due to a smaller increase in inventories and fewer exports. In addition, consumer confidence in August fell to the lowest reading since April 2009, according to The Conference Board.

“Recently released data on the housing market also showed less strength as well. The S&P/Case-Shiller® National Index fell 5.9 percent between the second quarters of 2010 and 2011, representing the largest yearly decrease since the third quarter of 2009. Moreover, July’s pending sales of existing homes fell at a monthly rate of 1.3 percent, the first decline since April 2011.”

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If you don’t believe it, consider that one of the world’s largest banks is now charging wealthy clients a fee for cash holdings. According to the Wall Street Journal, the Bank of New York Mellon now says “that customers that have deposited more than $50 million into their accounts since the end of July will face an annual fee of at least 0.13% of the excess deposits. The fee would rise if the one-month Treasury yield dips below zero.”

Think about what this means: If you give your $50 million plus to the nice folks at the bank they will not pay you interest if Treasury rates fall below zero because there’s no interest being paid by the government PLUS they will change you .13 percent on the account balance for the privilege of holding your dollars. That means there will be an annual $65,000 cost to park $50 million.

There’s a term for this: Negative interest. Honest. It means you pay the bank.

We have seen this before.

Just before World War II U.S. securities had negative interest levels. As Forbes magazine explained nearly 20 years ago, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992).

Why would anyone give money to a bank in exchange for negative interest?

One explanation is that it’s safer to keep money in a bank account than a mattress. Another reason is that a minimal loss is better than alternative “investments” where losses might be even greater.

Sadly, we have a country awash in cash at the very time the economy needs more spending. The catch is that:

• Workers can’t spend when job prospects are uncertain.
• Employers can’t hire when sale prospects are unclear.
• Banks can make money because they’re basic cost to access capital ranges from 0 to .25 percent — money they gleefully loan to credit card borrowers at 29.99 percent.
• Mortgage interest rates are at record lows — but home loans are tough to get because home values remain unsure.
• Home prices cannot rise because the huge numbers of foreclosures which remain unsold.
• Retirement accounts produce no meaningful income, meaning large numbers of people who saved and saved now face poverty.
• Heirs and heiresses can’t get lofty interest returns on the money left to them by Mummy.

The government — which CAN spend the money that could re-invigorate the economy — is being choked.  Effective tax rates — what’s actually being paid and not just what rules call for — are at the lowest levels in decades so the government cannot fund needed programs. The result is that a meaningful end to the current economic crisis is being stalled by the small-government, no taxes crowd that created it.

Is Negative Interest Coming To America? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The program cuts interest rates for eligible service members and waives late fees and other past due amounts. The 2.5 percent rate reduction covers a two-year window.

Service members are required to provide documentation confirming their service-connected disability. The program is open to disabled veterans regardless of financial hardship, although Citi will first evaluate applicants for a permanent mortgage modification. Those who aren’t eligible for the permanent modification can qualify for the special veterans program.

Surviving spouses are also eligible for participation, provided they are named as co-borrowers on a Citi-backed first mortgage.

“We recognize that disabled veterans may be having financial difficulties in this challenging economic environment, and they warrant our heightened consideration,” Sanjiv Das, CEO of CitiMortgage, said in a news release. “If they do not qualify for other assistance programs that are available, we are offering this program as another potential form of support.”

Military members with a government-backed mortgage (FHA, VA, USDA) or one that’s currently governed by the Servicemembers Civil Relief Act are not eligible to participate in the program.

To learn more, borrowers can contact CitiMortgage at 1-800-283-7918.

The relief program from Citi comes as financial institutions are facing greater pressure to ensure military borrowers are in good hands.

JP Morgan Chase announced in April it would pay $56 million to settle claims that it flouted federal law by overcharging military borrowers and improperly foreclosing on about a dozen.

In addition, a recent Government Accountability Office report showed that two huge mortgage banks improperly foreclosed on nearly 50 active duty service members. Regulators found the fraudulent foreclosures during an analysis of a mere 2,800 loans that went into foreclosure last year. The report didn’t name the two companies.

____________________
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

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This is important stuff for three reasons: First, HUD estimates that the 2010 GFE saves borrowers $700 per loan. Second, when a lender hands you a good faith estimate it’s a commitment to deliver a mortgage with certain terms and conditions once all application requirements have been met, say a 5 percent interest rate and not 6 percent by the time you get to closing. Third, you can check the lender’s promises at closing because the numbers from the GFE are used to complete the official settlement document, the HUD1.

In terms of graphics and layout the proposed CFPB forms — Prototype A and Prototype B — are well designed. There’s no doubt they’re easy to read and that they explain in plain language how a proposed mortgage will work. Kudos to the designers.

But while the CFPB has asked the public to comment on which design it prefers, the forms can easily be viewed as suggesting new and higher loan costs for borrowers — precisely what the new consumer bureau was designed to avoid. How? Not because of the form’s design characteristics but because of the numerical examples they illustrate.

Interest Caps

The model forms describe the terms for a 30-year ARM. The loan amount is $216,000, the start rate is 2.5 percent and the highest possible rate is 10 percent.

The forms also tell us that the interest rate can rise by as much as 3 percent after two years and 3 percent each year thereafter until the 10 percent maximum is reached.

These numbers are a gift to the worst lenders in America and describe a loan that’s simply awful. The government itself does not allow such terms for the mortgages it insures under the FHA and VA programs. Moreover, most private sector lenders — to their credit — do not demand such terms.

Most ARMs have a 2 percent annual interest rate cap and a 6 percent lifetime interest increase cap. To further clarify their terms, many ARMs also have an additional cap, a limit on the first adjustment after the start rate ends. Thus you might see an ARM with caps described as “2/6″ or “2/2/6.”

What the CFPB is describing is a 2/28 ARM with caps set at 3/3/7.5. In other words, the rate is fixed for the first two years of the loan term and then adjusts. Depending on rates at the time of the adjustment, the interest rate can rise or fall. In practice, the adjusted rate is likely to rise after the start because the initial interest level is deliberately set low to attract borrowers who might otherwise prefer a fixed-rate loan.

Why do lenders want to sell ARMs more than fixed-rate loans? Because the risk of inflation — higher interest rates — is shifted to the borrower.

So is it a big deal if the maximum rate can grow by 3 percent instead of 2 percent? You bet.

It’s possible, of course, that interest rates will not increase to the allowable maximums. However, the risk to borrowers if rates increase is enormous, especially in an environment where household incomes have been falling. Here’s why:

With the 2-percent increase annual costs can rise by as much as $2,716. If the maximum increase is 3 percent then the annual loan cost can grow by as much as $4,200. The larger increase can be as much as $1,484 per more year higher than the 2 percent standard.

Are these big increases? In many households the answer is yes. Are these increases large enough to lead to foreclosure? Unfortunately, in many households the answer will again be yes.

The situation, of course, can get decidedly worse. In year four the “better” loan can have another 2 percent increase and a third 2 percent increase in year five. That means the highest rate can grow to 8.5 percent in this example. For the loan that allows the 3 percent increase, the rate can grow to 8.5 percent in year four and 10 percent in year five, the lifetime cap.

The CFPB is on the right track. Consumer representation is a great concept, it’s long overdue and the Bureau is also new and untried. The Bureau will make mistakes. Big deal. Let’s have some perspective: The failure of existing regulators to adequately police lenders virtually bankrupted the country.

The CFPB is asking for public input, so why not do what existing regulators do and pay for a few hours of outside help?

Oh, and more thing, the forms have still another flaw. A huge flaw. But that’s a matter for another conversation.

Are ARM mortgage interest rates about to rise? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The short answer is that mortgage rates move on their own, with very little impact from the government.

Investors

Investors looking for mundane, low-risk returns generally have a choice between 10-year Treasury notes or 30-year mortgages. The two investments compete because 30-year loans are rarely outstanding for their full term, homes are typically sold or refinanced long before 30 years.

The result is that risks and rates for the two forms of investment are fairly similar so investors will move their money to the option which is best for them.

But can’t the government force mortgage rates up or down?

Oil & Energy

To answer this question take a look at oil prices. It would be very much in the interest of the United States to force down oil prices given that higher energy costs hurt our balance-of-payments, fuel inflation and are, essentially, a tax on every household. But the government — regardless of which administration you choose — has little to no leverage with suppliers such as our good friends and allies in Saudi Arabia, Iran and Venezuela.

Another part of the puzzle is that we value oil in terms of dollars. This is very good for the US, so naturally there’s a movement by Iran and others to measure the cost of oil in some other currency. In effect, one reason the price of oil has gone up is that each dollar buys less as a result of inflation over time. The way for energy producers to combat this loss of buying power is to raise oil prices.

For instance, oil futures have recently been priced at $99 a barrel. That’s in 2011 dollars. Corrected for inflation this $99 has the same buying power as $77.96 in 2001.

Inflation

Inflation to some extent is really not a problem — as long as your income keeps up. Unfortunately that has not been the situation for most American households.

Those with a household income of $52,587 in 1999 were likely to earn $50,303 in 2008.

Government-Set Rates

What the government could do — and what the government used to do — is set interest rates, not for all mortgages but for federally-insured mortgages such as FHA mortgages and VA financing. In fact, HUD actually set FHA mortgage rates until November 30, 1983 while the VA set rates until October 28, 1992.

Investors could then support government-backed mortgages or not — remember the government cannot compel investors to invest. If the market response was a fat “no,” if the set interest level was too low, then the government would have to raise the official rate. Such a system would effectively create an offer which investors worldwide could accept or not accept.

Of course, if the government again set mortgage rates for FHA and VA loans the public would readily know how much to pay for real estate financing. It’s an idea that worked well in the past, so why not now?

Is the government holding down mortgage interest rates? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Did you ever wonder why you get so many letters and emails from lenders who offer low mortgage quotes and seem to be affiliated with the FHA or HUD? The answer, very simply, is that you ought to wonder. Why? Lenders are not supposed to imply or infer any endorsement from the federal government.

Those strange communications which seem so “official” are simply tricks to gain attention from prospective borrowers, not much better than claims you’ve won a lottery or that a seductive encounter awaits your attention.

In the world of HUD-speak a “device” can be a letter, email, ad, or channel “soliciting, promoting or advertising FHA products or programs.”

Now, says HUD, FHA-approved lenders “are strictly prohibited from displaying the official FHA Approved Lending Institution logo(s) in a location or manner within a Device that creates the false impression that the Device is an official government form, notice or document or that otherwise conveys the false impression that the Device is authored, approved, or endorsed by the Department or FHA. Furthermore, alteration or modification of the FHA Approved Lending Institution logo(s) is strictly prohibited. Non-approved mortgagees, including Third Party Originators, are prohibited from using the official FHA Approved Lending Institution logo(s) on any Device. Moreover, use of the FHA logo is strictly prohibited. No person, party, company, or firm, including FHA-approved mortgagees, may use the FHA logo.”

Because of the new rule, starting in May you’re likely to see a whole new class of messages from lenders, messages which plainly state that the missive is not authored, approved, or endorsed by HUD or the FHA.

When looking at lender letters which hint or suggest some sort of government affiliation there are some question to be asked:

1. Is the sender an approved FHA lender?
2. Is the sender affiliated with your current lender? This is important because letters often contain the name of your current lender in big and bold type — but the senders actually have nothing to do with your lender.
3. No matter how seemingly “official” are you looking at a government form or some concoction churned out by a lender’s art department?
4. Is some sort of official sounding program mentioned? Is there actually any such program? Look up the program by name on the Internet and see if you find any government sites which explain the program in detail.
5. How can you get those low, low rates featured in the letter? That is, how do you qualify? (Beware, in some cases you can only get the lender’s touted rate by completing your loan application on the skin of a unicorn….)
6. Is there a minimum loan amount? How about a maximum?
7. Are the rate mentioned in the “device” subject to change?
8. Does the letter tout monthly payment savings? Does it also say that if you refinance with the lender it’s possible that your interest rate or overall loan costs could actually rise over the life of the loan?
9. Does the letter include some legal-sounding jargon about interfering or obstructing the mail? Does it make the letter seem more important? Is it anything but nonsense?
10. Does the letter make any reference to borrowers with bad credit? If you have damaged credit do you really think the lender has some magical way to offer a discounted interest rate?

Of course, when looking for a mortgage always protect your interests — shop around, speak with several lenders and get written Good Faith Estimates (GFEs).

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In a very-direct way gas prices have a lot to do with current mortgage rates, refinancing and mortgage quotes. And today’s mortgage rates have a lot to do with home prices and affordability.

Okay, how can this be?

When gas prices increase the effect is felt throughout the economy. Trucking companies need more dollars to pay energy bills and suddenly the price of food and just about everything else goes up. Higher prices begin to show up in super markets, hardware stores and shopping malls.

Lenders want to assure when they loan money that the interest rate produces a profit. But profit to lenders doesn’t just mean they want 5 percent instead of 4 percent, what they really want is a rate of interest which is higher than the rate of inflation.

Inflation

Let’s say that $100 will buy 50 loaves of bread. If the rate of inflation is 2 percent annually then next year it will take $102 to buy the same number of loaves. Notice that the number of loaves is the same, what’s changed is the buying power of cash.

The real measure of wealth is not currency, it’s buying power. Several years ago in Romania I had a dinner which cost 500,000 old leu. It was a very nice dinner involving several courses, part of a medium-rare bear, a four-piece band and a castle-like setting. In US money the actual cost of my meal was about $13.

So, when gas prices rise and other prices go up we have an increase in the cost of living — in other words, a dollar will buy less. Lenders will see this and want a better return for their capital, meaning higher interest rates. Higher interest rates, unfortunately, are never good for real estate because the pool of qualified buyers shrinks, there’s less demand for property and less demand means stalled or lower prices. Overall, the push toward economic recovery is stymied.

And that’s not all.

Suburban Sprawl

The Census Bureau says we now have almost 309 million people. It’s a big country but most people prefer to live in 150 or so major metro areas. These metro areas are not static, they are growing in many cases as suburbs push further and further out.

The price of gasoline is a real cost. Yes, you can get a bigger and better house by moving further from a metro center, but if your commute requires gas then houses more distant from downtown begin to be less attractive as energy price rise. Not only is the commute long, now the cost of commuting goes up.

The result is that houses in outer suburbs away from jobs see less demand and reduced pricing pressures while homes nearer to employment centers gain more value.

It typically happens that close-in properties to the west of metro centers have more value than other areas. Why? Because the wind and the weather largely blow from west to east, meaning historically if you live west of town you can avoid the smells of the refineries, stockyards and industrial areas by living up-wind.

The bottom line: Sustained higher gas prices will cause mortgage loan rates to rise, refinancing interest levels to increase, property values to generally wallow and prices for more-expensive close-in homes to rise or at least resist further erosion.

Will Rising Gas Prices Down Home Values? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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According to Frank Nothaft, Freddie Mac’s chief economist, “market concerns over stronger economic growth that, in the near term, could lead to an increase in inflation have sparked a rise in bond yields and mortgage rates have followed. For instance, the growth in retail sales excluding automobiles in November was twice that of the market consensus forecast. Industrial production showed the biggest gain in November since July, according to the Federal Reserve Board. And consumer sentiment, as measured by the Thomson Reuters/University of Michigan index, rose to a six-month high in December. As a result, interest rates for 30-year fixed mortgages this week were the highest since the week of May 20th of this year.”

At the same time, and not to be a downer, unemployment is at 9.8 percent according to official figures from the Labor Department. The actual percentage is higher according to the manner in which most humans define the term unemployment.

The interest cost for a 15-year fixed-rate loan averaged 4.17 percent. A year ago the 15-year FRM averaged 4.38 percent.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.77 percent, still below the 4.37 percent average from a year ago.

The 1-year Treasury-indexed ARM averaged 3.35 percent compared with 4.34 percent last year.

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