Mortgage Rates Are Falling – Again

Mortgage rates are dropping again for 30-year, fixed-rate mortgages. During the months of July through September, mortgage rates began creeping up, producing a flurry of home sales in anticipation of even higher mortgage rates to come. However, it appears those concerns of much higher mortgage rates have flown out the window as mortgage rates are back down to levels not seen since June.

What’s the Cause of the Drop?
The recent government shut down may partially be to blame for the drop in rates. The shutdown led to speculation about the Federal Reserve refusing to renew its bond purchases. Another possible cause appears to be September’s weak employment. Only 148,000 jobs were added last month, which was far lower than the expected increase of 193,00 jobs. The 30-year fixed-rate mortgage rate was listed as 4.13% last Friday (Oct. 24) which was down from 4.28% from the week before, but still higher than the 3.41% rates in October of 2012. Rates also fell for:
• 15-year fixed-rate mortgages,
• 5-year Treasury-indexed adjustable-rate mortgages, and
• 1-year Treasure-indexed adjustable-rate mortgages.

Rate Changes
The average rate change went down by only a small amount in each case. These rate changes did not reflect closing costs, though.
• 30-year, fixed-rate mortgages dropped 0.8 percent.
• 15-year, fixed-rate mortgages dropped an average of 0.6 percent.
• 5-year, adjustable-rate mortgages were down an average 3 percent.
• 1-year, adjustable-rate mortgages were down an average of 0.5 percent.

Speculation About the Government Shutdown
There has been a lot of talk about the recent government shutdown and what could have happened to mortgage rates if the shutdown were to continue over a longer period of time. In many communities across the US, applications for government-backed mortgages dropped during the 2-week long shutdown, which only fueled the speculation about what would happen if Freddy Mac and Fannie Mae were to run out of funds completely. Among the public’s concerns were worries about
1. where the mortgage money would come from;
2. mortgage lenders running amok with rates all over the place due to the lack of government backing; and
3. long delays in getting government-backed mortgages, which would only increase the longer the shutdown continued.

What’s to say that another shutdown won’t occur? What then? Many of the mortgage-lending delays occurred because lenders require verification of borrowers’ income tax and social security information to help determine their qualification for a loan. When the government shuts down, the IRS and Social Security Administration close their doors and send employees home, so the information they provide becomes unavailable. The longer the shutdown lasts, the longer it takes lenders to get the information, which in turn, lengthens the time it takes buyers to get into their new homes.

Is it time to overhaul the mortgage rules and the government’s role in the mortgage industry? Who’s to say, though there seems to have been some discussion along this line lately. This may be another wait-and-see scenario. In the meantime, it’s benefiting the real estate industry by allowing interest rates to drop again and keep the potential for buying a home within the realm of possibility.

3 Details That Affect the Mortgage Rate Offered

Everyone is aware of the rates that are offered by lenders, however, these are basically the lowest advertised interest rates available to borrowers. Very often, borrowers may feel that they have been lied to when they do not receive the rate that they are hearing or reading about. However, there is definitely a reason for this because there are 3 details that affect the mortgage rate that is offered to a borrower.

1. Debt to income – The debt to income ratio (DTI) is a calculation of the total debt held by a borrower in comparison to the total income. Mortgage products have maximum debt to income ratios that are acceptable. In addition, lenders may add their own restrictions which may further reduce the debt to income that is necessary for a particular mortgage program. Since debt to income measures the total amount of debt that a borrower has and will have with the new mortgage, it is important that as much debt as possible is reduced prior to applying for a mortgage. The higher the DTI, the mortgage rate offered to a borrower will also be higher.

2. Credit Scores – While DTI is an important measurement of debt and income held by a borrower, credit scores are a reflection of that debt and how it is managed. While both scores and credit history are considered when processing a mortgage, the actual middle score will be used when determining the mortgage rate to be offered. Borrowers who have higher credit scores, are offered the lowest rates.

3. Loan to Value – The loan to value (LTV) of a mortgage is the measurement of the loan against the value of the property that is either being purchased or refinanced. It is the final appraisal that determines the loan to value for the lender. While different mortgage programs have varying loan to value rules, such as FHA and VA, conventional mortgages require the lowest loan to value. This means that borrowers must have a larger down payment for this type of mortgage. Any LTV above 80% will require that the borrower pay private mortgage insurance. In addition, with higher loan to values, the mortgage rate will also be higher.

Lenders use rate sheets when quoting a mortgage rate to a borrower. These rate sheets have adjustments for each of these separate occurrences listed above. Each adjustment adds a certain percentage to the initial mortgage rate. For this reason, the final mortgage rate that a borrower is offered and accepts is seldom the same as the advertised rate.