This weekend is Super Bowl Sunday. This is always an exciting time of the year for me, and I’m not just talking about the big game. I expect New England will dominate, and hopefully the Giants will make a game out of it, and we won’t stay tuned just for the commercials. I enjoy the beer and the food and the chance to visit with friends. But that’s not why I’m excited either. Here in Chicago, Super Bowl Sunday traditionally represents the start of the Spring home buying season. As a mortgage banker who loves working with first time home buyers, that’s a great reason to get excited.

Are you a first time home buyer in the market for a new home? With the Chicago area home market slow, and interest rates low, this could be the best time in years to buy your first home. It is a buyer’s market, and you can find bargains if you are ready to go.

One of the biggest hurdles keeping people from buying their first home is coming up with the money for the down payment and closing costs. The good news is there are a lot of ways to buy a home, even if you don’t have much cash. If you’ve been saving and you have ready cash, that’s great. But if you don’t, there are still ways to raise what you need to buy. Here are a few random ideas:

1. Lotto tickets. Well, maybe not. If you’re truly lucky you might be able to buy a home and skip the mortgage. But odds are against it. Big time.
2. Tax refund. This is what usually gets the Spring market going. You’ve received your W2s by now, and refund checks will be in the mail shortly. Your refund might be just enough to get you into a home. 
3. Stocks, savings bonds. Do you have any savings bonds that are tucked away? Many people have stocks and bonds from gifts years ago. A good use for them might be to buy your first home,
4. Gift from a relative. Many programs allow the down payment to come from a gift from a relative. If you have a generous relative who is willing to help, this could be just what you need.
5. Cash out your 401k. If you have money in your company retirement plan, you can liquidate it and use it for your down payment. Because you didn’t pay taxes on it up front, you will have to pay taxes on the amount you liquidate as well as a penalty for withdrawing it early. This can still be a good option in some cases, but a better option might be -
6. Take out a loan against your 401k. The advantage here is that you are paying your self back and you still have your retirement account. Most plans will let you borrow up to half the value in your account, and the interest rate and terms are set so the payment (to yourself) will be affordable.
7. Sell something – If you’re like most people, you probably have more stuff than you know what to do with. Some of this stuff may have value, if you are willing to part with it. Do you have a boat or a motorcycle? How about baseball cards or other collectable’s? EBay makes it easy to convert stuff, to cash, and this could be just what it takes to get you into a home.
8. Down payment assistance programs.  Nehemiah and AmeriDream are two versions of these programs. These are non-profit groups that, in a sense, launder a credit you negotiate from the seller in a way that you can use it for your down payment. These are usually used in conjunction with an FHA loan. I’ll post more on these later. If you have questions on how they work, give me a call.
9. Government grant programs. There are programs like the Chicago Bond Program and the Illinois Bond Program, which provide you with a grant at closing for the money you need for the down payment and closing costs. You need to meet the guidelines, but if you qualify it is often the best way to buy.
10. Look at the long range. Maybe you don’t have the cash to buy what you are looking for, but this might be the time to put yourself on a savings program so you will have it down the road. What can you do now to get extra cash?  Can you take on a second job? How about cutting your expenses? You might be surprised at how much you can save if you have a goal and a plan.

There are lots of ways to buy without having a lot of cash. Use your imagination and you can come up with some more ways to come up with the down payment.

Illinois Mortgage Rates and News

Last week The Fed unexpectedly dropped the discount rate by a full 3/4s of a point. Since then my phone has been ringing off the hook. The Fed is expected to cut rates again today, so my phone should keep ringing. This happens every time the Fed announces a rate cut. Most people assume that a change in the Fed rates will mean a change in the rates charged for mortgages. There is some truth to this, but it isn’t a direct connection. In fact, it’s not uncommon for mortgage rates to jump higher when the Fed lowers the rates. (Last week the market did both - dropping at the announcement, but moving sharply higher by the next day.)

So the question is, why does it work this way? The short answer is that the Fed (The Federal Open Market Committee) controls short term rates, and mortgages are priced based on the expectation of long term interest rates. The long answer is more complicated.

The Fed controls short term interest rates by setting the federal funds rate and the overnight lending rate. These set the rates that banks can borrow from the Federal Reserve Bank. The Fed uses these interest rates as a way to control the money supply, putting more money in circulation at lower rates when the economy is slowing down, and raising the rates to slow down the economy when it is growing too quickly. When the fed funds rate is lowered, this lowers the banks cost of funds, which quickly translates into their lowering the Prime Rate (the rate banks charge their “best customers” - it is set 3 points above the Fed Funds rate). So when the Fed cut rates last week, anyone who had a home equity loan just found a little more money in their pockets. The conventional wisdom is that the Fed will cut rates again today, so this will help even more.

These short term rates can stay the same for months at a time. By contrast, mortgage rates change every day, sometimes (like last week) they can change several times in the course of a single day. These rates are set more by supply and demand, the same way as the prices move up and down in the stock market. Traders buy and sell mortgaged backed securities, which are similar to long term bonds.

When a wholesale mortgage lender (the big banks we lock our loans with) locks in an interest rate, they hedge the lock by buying a future contract tied to that mortgage rate. By hedging they are locking in their profit. As long as the loan closes, it doesn’t matter if rates go up, or down, they are protected from loss. Most mortgage lenders price to the market, so interest rates for mortgages change based on what is happening in the market. The wholesale lenders send out their rates each morning. If the market changes by more than a minor amount, they will re-price, so anyone locking in their loan will be subject to the new pricing.

When traders buy or sell a mortgage backed security, they are looking into the future and trying to anticipate what is going to happen years down the road. Mortgages are usually based on a 30 year term, but the average loan will be paid off earlier as people either sell their homes or refinance. Traders are usually looking out 5-7 years in the future.

Mortgage rates are most affected by the threat of inflation and the strength of the economy overall. When inflation rises, prices are moving up so it takes more money to buy the same amount of a good or service. To a mortgage holder this means that the borrowers are paying them back in cheaper money. Because of this, they react strongly to any hint of inflation, sending mortgage rates higher.

When the economy is growing strongly, it is the Fed’s job to keep inflation under control. It does this by increasing short-term rates, which slow down demand and act as a brake on the economy. Generally when the economy is strong, prices tend to increase. So if there is good news for the economy, it is bad news for mortgage rates. On the other hand, bad economic news tends to make the rates go down.

So back to where we are now. We’ve been hearing lots and lots of bad news about the economy over the last months. With the housing market down, consumers are strapped and less likely to spend. The credit crunch is not just with housing though, some of the biggest concerns are with the losses by the big banks and bond insurers, and that we still don’t know the full extent of the problem. On the other hand, inflation is still a problem. Oil is up close to $100 a barrel, and this affects the cost of everything. Lower rates can fuel inflation, which in turn causes the mortgage bond traders to worry about their positions. So mortgage rates have moved back and forth based on the perception of which is a worse problem now, inflation or recession. An added layer now, is whether the Fed knows something the rest of us don’t, and this is why they have been so aggressive, or if they are floundering with out a firm plan.

My experience is that, over time, mortgage rates move in the same direction as Fed policy. If the Fed is reacting to a true slow down, inflation isn’t as much of a concern. In a real slow down deflation is a bigger worry. Mortgage rates now are slightly higher than they were before the Fed cut rates last week, but for a short period rates dropped to their lowest point in years. Over the last week, with the announcement of the economic stimulus plan and a rescue plan for bond underwriters, we’ve had some news come out that moved mortgage rates higher.It may not last, but my guess is we will see some news break on the other side, and over the next few weeks I won’t be surprised if mortgage rates start falling again.

Illinois Mortgage Rates and News

Welcome to this week’s Illinois Mortgage Rates and News week in review, my take on the week’s financial news and how it affected Illinois mortgage rates.

The week is over and I think I need a drink. Maybe a lot of drinks. Or maybe I just need to hit my head against the wall for a while. Yes, it’s been that kind of week. The mortgage markets - and mortgage rates - moved so far and so fast, down and up and then down again, that I’m pretty sure I’ve got whiplash.

It started with the surprise rate cut Tuesday morning (full run down here). Fear and greed took turns at the wheel and mortgage rates dropped to their lowest point in the last several years. For about an hour. Then the market swung back around and rates shot up, and all of a sudden we were higher than we’d been at the start of the week before the Fed cut the rates. This volatility overloaded the system. Wholesale lender’s web-sites crashed as they tried to handle the flood of locks coming in. On a personal level, I can tell you that this was more excitement than I am used to. When you think of exciting jobs, mortgage banker is probably not one of the ones that first to come to mind. This week it was.

Besides the big rate cut, the major news was the proposed economic stimulus plan. In a rare show of bipartisan support, congress came together with President Bush to offer a $150 billion worth of rebates to tax payers and small businesses, with the hope that shoving enough money into the economy will give the economy a jolt and keep us out of a recession. The proposed plan offers tax rebates of $600 to individuals and $1,200 for couples, with additional rebates for families with children. There are extra credits for businesses who buy equipment, and some special incentives to help the real estate market. The proposal would allow a temporary increase in the conventional lending limit from $417,000 for a single family home now, to 125% of the median home price up to $725,000. It will also increase the FHA lending limit. Though the plan has moved out of the House of Representatives, it still needs to be passed by the Senate, and the President needs to sign it before it becomes law. So it might be a while before you get your check, or are ready to apply for a an extra large conventional mortgage.

I hope the stimulus plan works, and I hope that it brings the real estate market roaring back. But my suspicion is that this is more of a political move than anything. A big part of the problem in our economy is the lack of savings. This doesn’t address that, and throwing money out randomly doesn’t mean people will spend it, or use it in a way that will spur the economy forward. That said, I will be more than happy to cash my check.

So how did all this news affect the markets? Rates this week are slightly higher than they were at the end of last week. Still, refinancing activity picked up a lot. If you weren’t able to lock in when the rates were near their lows, I encourage you to get your paperwork in to your friendly neighborhood loan officer, and be ready. We may have another shot at this over the next few weeks, and you are in a much better position if your paperwork is in and you are ready to go. All this activity should also bring out more home buyers.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.625%    5.734% APR

15 year fixed rate    5.125%    5.237% APR

5-1 A.R.M.               5.25%      5.395% APR       

7-1 A.R.M.               5.25%      5.395% APR

For Jumbo loans over $417,000

30 year fixed rate    6.25%       6.375% APR

7-1 A.R.M.               5.75%       5.893% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate    5.50%       5.823% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week is packed with big economic news. The Fed meets on Wednesday where it is expected that they will cut short-term rates another half a point. Durable goods orders, new home sales and GDP numbers will all be released next week, as well as the biggest market mover, the employment report which will be released next Friday. With all this activity, expect more volatility.

Illinois Mortgage Rates and News.

It was the Martin Luther King holiday Monday and the markets and banks were closed. My company was also closed for the observance, but I had some work to catch up so I put in a half day. As I said the markets were closed, so I didn’t obsessively check the mortgage bond market as I often do. The day played out quietly. An uneventful day. Maybe it was the calm before the storm.

Later that night I heard that there was turmoil in the foreign markets. The stock markets throughout Europe and Asia were selling off in a reaction to the problems here in the US of A. Maybe the catalyst was Bernanke’s acknowledgement that we were in danger of a recession, or maybe it was a reaction to President Bush’s stimulus package. Whatever it was it was trouble. We live in a global economy now. What happens in China is quickly felt in California, and what happens in Washington is felt around the world.

Tuesday morning the Fed cut the discount rate by ¾ of a point – a huge amount, and the timing, one week before the Fed meeting, added impact, and maybe a whiff of panic. Even after the cut, the stock market opened with big losses. At one point during the day stocks were off by 500 points, before recovering somewhat. It makes you wonder, what would have happened if the Fed had sat it out and waited for their meeting next week before dropping the rates? If that had been the case, we’d be talking about Black Tuesday, now.

Mortgage rates don’t always correlate with changes in the Fed rates. The Fed controls short term rates, and mortgage interest rates move up and down based on the trade in mortgage backed securities. It’s often the case that the Fed lowers the discount rate and mortgage bonds sell off, pushing interest rates higher. Not so yesterday. Mortgage bonds shot higher and mortgage rates dropped like a stone. Suddenly we were in a hot refinance market.

This morning the trend continued. The stock market continued to fall and mortgage rates dropped to the lowest point in years. I was quoting rates today in the low 5s! The year started out in the low 6s, so this is nothing short of extraordinary. But one lesson I’ve learned over the years, is that if you have a good situation, you should take advantage of it, because you don’t know how long it will last. The stock market changed direction late in the afternoon and ended up erasing its losses with the Dow gaining nearly 300 points. Money rushed out of mortgage bonds, and interest rates moved up sharply.

The sad part of this is, most people didn’t lock into the low, low rates. I signed up a fair amount of my past clients for refinances today, but many of them decided not to lock, figuring the rates would drop even lower. This still may happen. There was some good news coming out of Wall Street today, but I would bet we still have some more problems ahead. If we have the chance again, I would encourage people to jump on it.

As I’ve written before, this has been an extremely volatile market, and I expect the volatility to continue. There is an old Chinese proverb, or curse, which states, May you live in interesting times. We surely do.

Illinois Mortgage rates and News

Today’s Illinois Mortgage Rates and News week in review is my take on the week’s financial news and how it affected Illinois mortgage rates. There has been a see-saw battle over the last weeks and months as to what our bigger economic problem is – inflation or recession. Over the last few weeks with the release of a weaker than expected jobs report and comments by Fed Chairman Ben Bernanke, recession was gaining a decided edge. This week is notable because it is now in the open. All the powers that be are using the R word. We are either in one, or about to enter one. Inflation is still out there, but it’s on the back burner, a problem for another day.

Most of the news coming out this week confirmed the trend. Retail sales for December were released and instead of the small gain that was expected, sales were down. Housing starts fell to the lowest level since 1991. With new construction off so much, this is bad news for everyone in the construction industry, but it is good in the long run. In order for the housing market to improve we need to get rid of the excess inventory. That is hard to do when builders are putting more homes on the market.

Merrill Lynch wrote down another 10 billion in bad mortgage debt, their second major write down. The big question is how much more bad debt is still out there. As the big banks write off all their bad debts, they’ve needed to take on new capital. For the source of this new money they’ve turned to foreign investors, mostly China and Arab oil interests. Immigration is already a big issue in this years presidential campaign. I expect the sale interest in our big banks will be soon. The other big news this week was how everyone is suddenly if favor of an economic stimulus package. Bernanke came out in favor of the idea. President Bush has a plan and the Congress has their own. Whether it’s more tax breaks for businesses, or money in the mail for tax payers, more money will be pumped into the economy soon.

So how did all this news affect the markets? The stock market continued to get hammered, and mortgage bonds improved with mortgage interest rates continuing to fall. Conventional mortgage rates are now at their lowest point in the last several years. We are seeing a lot of refinancing now. Refinancing your mortgage makes sense for anyone who has bought a home in the last few years, as well as for those with adjustable rate mortgages that are about to adjust and home owners who have debt to consolidate. The low rates are bringing out more buyers, too. Even with all the doom and gloom there are a lot of good reasons to buy a home in the Chicago area now.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.50%    5.624% APR

15 year fixed rate    5.00%    5.136% APR

5-1 A.R.M.               5.125%   5.285% APR       

7-1 A.R.M.               5.125%   5.285% APR

For Jumbo loans over $417,000

30 year fixed rate    6.25%      6.375% APR

7-1 A.R.M.               5.625%    5.773% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate   5.375%    5.647% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

There won’t be a lot of reports issued next week, so the focus will be on the Fed meeting to be held January 30^th, where they are now expected to lower the discount and Fed Funds rates by a half a point.

Illinois Mortgage Rates and News.

Conventional wisdom says that this is an awful time to buy a new home. The housing market is in a funk. Mortgage companies have tightened their guidelines and homes are sitting on the market for months without selling. If you listen to the news it’s all doom and gloom with talk of recession and inflation, and questions of how long it will be before we see a recovery. So who would be crazy enough to buy a home now?

There is a famous quote by noted investor Baron Von Rothschild – the time to buy is when there is blood in the streets. Here in Illinois the market isn’t as bad as it is in other parts of the country, but if you are a seller sitting in a home that won’t sell, the situation is grim. But the bad news for the seller is great news if you are looking to buy a home. Here are some reasons to buy a home here in the Chicago area, now:

Selection – There are homes in the market in all areas and all price ranges. With more houses on the market you can pick and choose and find the home you want. It wasn’t so long ago that buyers were jumping on new listings as they came onto the market, even if the home wasn’t exactly what they were looking for. You can pick and choose, now.

It’s a buyer’s market – Again, the best time to buy is when most people want to sell. If you buy now you can get a lot more house for your money, and you have a lot more negotiating power.

Interest rates are low – Mortgage interest rates are at their lowest point in the last several years. This means your mortgage payment takes you a lot farther than it did before. We’re not that far off of the all time lows we hit several years back. It is smart to take advantage of the low mortgage rates while they are still available.

Great financing is available – There’s a lot of talk about how the problems in the mortgage market have made it harder for borrowers to get financing. Some programs have been cut out, and guidelines are tougher than they were before. But there is still a lot of mortgage money available, including options for low or no money down, and some great programs for first time home buyers. If you are a first time home buyer in Chicago, you may qualify for the City of Chicago Bond Program which offers a below market interest rate and a grant to cover your down payment and closing costs. There are other programs for home buyers in other areas of Illinois with great rates and low fees.

Tax savings – Buying a home is one of the best ways to save money on taxes. Your mortgage interest, real estate taxes and in many cases mortgage insurance are all tax deductible. If you are a first time home buyer this means that after-tax, you can pay a lot more for a mortgage payment than you pay for rent.

Appreciation – This might not seem like the best reason to buy, with prices stagnating and falling in some areas, but in the long run, home prices always move up. There is a lot of pessimism in the real estate market today, but even the most pessimistic are bullish in the long run.

Equity build up – As you pay down your mortgage you build up equity in your home. Most people don’t even think of this because it is so gradual, but every mortgage payment (as long as it is an amortizing loan) pays a little less interest and a little more principal. In a way owning a home is a form of forced savings.

Tax refunds are coming out – If you wanted to buy but were short of cash, your tax refund could be just what you need for the down payment and closing costs.

Rents are rising – Buying a home means you can fix your mortgage payment, at least the principal and interest portion. Rents are projected to rise this year and over time.

Those are the hard financial reasons for buying a home now, but there are other good reasons to buy now:

You need more room – Has your family has grown, and you are bursting at the seams? You need a new place to put all your stuff? If you have needs that you’ve been putting off, this could be the right time to buy and take advantage of the buyers market.

Control – If you own your home, you can do what you want to with it. Have a dog? Not a problem. Want to plant a garden? Go for it. Want to paint stripes on the walls? Paint your heart out, it’s your home and you are in control.

Pride of ownership – There is a big difference between renting a place and having a home of your own.

It’s the American Dream – Not only that, but buying a new home gives you a reason to throw a house warming party.

These are some reasons for buying now, but buying isn’t the right course for everyone. Buying a home is a long-term investment. If you can’t afford to hold on for the long run, you might be better off renting.

Illinois Mortgage Rates and News

Mortgage interest rates are ticking down and refinancing is suddenly hot again. Make that Scorching Hot! A few years back when mortgage rates first dropped into the 5s, mortgage refinancing was the hot topic anywhere people gathered. It might not seem like the most scintillating party conversation, but this was a prime conversation as people vied for bragging rights on who was able to get the lowest interest rate. (Or maybe I just went to the wrong kind of parties.) Mortgage rates are back in the mid 5s again, and this time there isn’t the same level of excitement in the air. But it is a great time to take advantage of the low rates, improve your financial situation and put some extra money in your pocket

Why should you consider refinancing?

• You can lower your interest rate and payments.
• You can shorten your loan term and pay your mortgage off early. 
• You can take cash out for home improvements, college expenses, investments, or whatever your needs may be.
• You can restructure your debts with a refinance to get rid of your high interest credit card balances and save hundreds of dollars per month.
• If you bought with a low down payment, you can often refinance to get rid of mortgage insurance or your higher rate second mortgage.

You can get rid of an adjustable mortgage and lock in to a fixed rate.

These are just a few reasons you may want to take on a new mortgage. It is important, though, to make sure you know why you are refinancing and that it is really in your best interest.

For a quick check to see if refinancing makes sense for you, you need to consider 3 things:

How much will you save by refinancing?
How much will it cost to refinance?
How long do you expect to stay in the mortgage?

There used to be a rule of thumb that said that the interest rate needs to go down by 2 percentage points before it makes sense to refinance. This is no longer the case. The process has been streamlined, and closing costs are usually much less, at least here in Illinois where title costs are reasonable. So it may make sense to refinance even if you are only reducing your interest rate by a relatively small amount. (There have been periods when the rates were dropping, where I refinanced the same customer 3 times in a year, and they benefited more each time.) To find out you need to figure out your payback or break-even point. Let me work through the math to show you how this works.

The first step is to determine how much you will save. For an example, let’s assume that you now have a mortgage with a $200,000 balance and a 6.75% interest rate. This would give you a payment of $1,297 per month. Let’s say that rates have improved, and you can now get the same type of mortgage for 5.75% with a payment of $1,167 per month. This is a savings of $130 per month. Does it make sense to refinance?  Maybe. We still need to know more, though.

The next thing you need to know is how much it will cost to refinance. This is where it gets interesting. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs vary by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees and the amount the bank charges to process the loan, which includes fees for credit reports, appraisals, processing and underwriting charges as well as Points which are upfront financing charges.

To see how the closing cost can make the difference, let’s assume that the cost to refinance is $1,600. If you are saving $130 per month and it cost you $1,600 to close, that means it will take you just about a years worth of mortgage savings to pay off the up-front costs. Every month after that will be a true savings. If that same loan cost $6,000 to close, then it would take 4 years before you would have any benefits from refinancing. So the lowest rate isn’t always the best deal.

The next part is figuring out how long you expect to be in the mortgage. If you plan to stay in the home for at least 10 years, and you don’t expect that interest rates will drop much lower than they are, then paying more to get a better rate might be the best strategy. Most people will either move or refinance sooner, though. The average 30 year mortgage is paid off in about 5 years. If you are like most people, you would be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come quicker.

Things to watch out for- The idea that the lowest rate is the best deal can be a big problem. A few years back when we were in a huge refinance boom, one of my clients talked with a friend who boasted about the great deal she got, a rate below anything available on the market. My client called and she wanted the same rate as her neighbor was getting. I did a little research and found out that her neighbor was paying 3 points to buy down the rate. On a $300,000 loan that comes out to $9,000 in extra closing costs! A low rate is great, but it’s not going to help you if you have to pay so much extra to get it. Which brings up our next point. Refinancing doesn’t have to cost a lot.

No/Cost refinancing - When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.

Some people say there is no such thing as a true no-cost refinance. It does cost money to refinance, and it’s true, the lender and title company are going to be paid, one way or another. With a no-cost refinance we use the yield spread premium (the money that the lenders pay the mortgage broker or banker to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering them a slightly higher interest rate means that the lender pays us a higher premium, which can then be used to cover all of the loan costs. This program isn’t available with all lenders, but is available with many mortgage brokers or mortgage bankers.

Here is how it works. Let’s say you have a mortgage with a balance of $250,000 and an interest rate of 6.75%. This loan would have a monthly payment of $1,621 for principal and interest. Let’s say that rates drop. If you are able to refinance at 5.75%, your new payment will be $1,459, for a savings of $162 per month with closing costs of $2,000.

If 5.75% is available with closing costs, the rate with no closing costs would be around 5.875% - just an eighth of a percentage point higher. This means a payment of $1,479 and a savings of $142 per month. The monthly savings are lower, but you save $2,000 up front. This works especially well for people who don’t plan on being in their home or their mortgage forever, or if you think that the rate trend is going down and there may be more opportunities to refinance and lower your payments again down the line.

No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.

Things to watch out for – A true no/cost refinance means that you are not paying any fees or costs to get the loan. This is different than adding the fees and costs back into the loan. This means that your mortgage will be larger, and you will be paying the costs of refinance over the years you have the loan. There is no money coming out of your pocket at closing but you are still investing extra money. If you sold the home or decided to refinance again later, the money you paid will be gone. In some situations this could be the right way to go, but it is not a no-cost refinance. You need to know exactly what it is you are signing up for. That way, the next time you go a party you can be the one doing the bragging .

Illinois Mortgage Rates and News

It’s Friday, and time once again for the Illinois Mortgage Rates and News week in review, my take on the week’s financial news and how it affected Illinois mortgage rates. This week continued the knock down, drag out fight in the mortgage market between the forces of inflation and the forces of recession. The Fed has nervously watched to see which side would gain an advantage. Wall Street has called for bold, moves and massive interest rate cuts to prop the economy up and keep it from falling deeper in recession. The danger there is that cuts too big and too quickly could fuel inflation. With oil and food prices already high, this has been a problem. But this week it appears that recession has scored a knockdown, inflation might not be on the ropes, but it’s now acknowledged that recession is the bigger problem - for now. That means more rate cuts ahead.

There weren’t a lot of economic reports released this week. The big news was in a speech by Fed Chairman Bernanke, where he tipped his hand that he was prepared to take "substantive action" to keep the economy on track. The weak jobs report released last week was the factor here. Bernanke’s statement was interpreted by the financial markets as an expectation that the Fed will cut rates by a half point this month, with more cuts to come.

The other major news this week was the sale of Countrywide Financial to Bank of America. Countrywide, the nation’s largest mortgage lender, has been on the rocks since last summer when the sub prime mortgage market melted down. They were a leader in both sub prime and Alt-A lending, and when the market for these loans disappeared, they were suddenly in a whole mess of trouble. They had to get huge infusions of cash several times over the last months - including 2 billion from Bank of America - just to stay in business. This week rumors were flying about Countrywide being on the verge of declaring bankruptcy. Bank of America stepped in late in the week with an offer, and the deal came together this morning.

The mortgage bond market fluctuated over the week as money shifted back and forth between stocks and bonds. Even with the lack of news, the market was volatile and it looked like it was changing direction several times. At the end of the week more money flowed into bonds, and rates on some loans fell to a low for the week, matching their lowest point in the last two years. 

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock with 0 points, and no origination fee.  The conventional loans are based on the highest loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.):

Conventional loans up to $417,000

30 year fixed rate    5.625%    5.734% APR

15 year fixed rate    5.125%    5.237% APR

5-1 A.R.M.               5.25%      5.395% APR       

7-1 A.R.M.               5.50%       5.627% APR

For Jumbo loans over $417,000

30 year fixed rate    6.25%       6.375% APR

7-1 A.R.M.               5.625%     5.773% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate    5.50%    5.823% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week a lot of economic news is coming out. The PPI and CPI, two measures of inflation in the economy, come out Tuesday and Wednesday. Retail sales and industrial production numbers will also be released.

Illinois Mortgage Rates and News.

In my last post, I responded to a question that Wicker Park Realtor  Dave Weiss asked about why advertised rates are never right. Part of the reason is because so many lenders play fast and loose with the truth in order to get their phones to ring. This is a classic bait and switch, and it gives our industry a bad reputation.

Another part of the picture is that there is no way that an advertised rate can be correct without taking into account all the factors which go into pricing a loan. When a lender takes on a new mortgage their goal is to minimize their risk and make sure that they are getting paid for the risks they are accepting. Lenders access their risk first by underwriting the loan and making sure it meets all their guidelines. Based on past performance, some loan characteristics increase the chance that the borrower will default on their loan, costing the lender money. Lenders, mortgage bankers, and mortgage brokers are willing to approve loans which have these factors, but they want either a higher rate or more fees in order to make up for the higher risk.

Here are some of the things that factor into the price of a loan, and how I price out my Illinois Mortgage Rates:

Credit scores – Fico scores are a measure of how likely a borrower is to pay back the loan. Up until recently, if you qualified for a conventional loan (a loan that was eligible for purchase by Fannie Mae or Freddie Mac, the 2 biggest purchasers of mortgages in the aftermarket) your pricing would be the same whether your score was in the low 600s or the high 800s. If you didn’t meet these guidelines you could still get a mortgage at a higher rate, but these were considered Alt-A or sub prime loans. But that is changing because of all the problems in the mortgage market. Sub prime and Alt-A loans are pretty much gone now, and Fannie Mae and Freddie Mac have recently adopted risk based pricing. This means that Borrowers with lower down payments and credit scores below 680 will now pay more for their mortgages.

In order to quote an accurate mortgage interest rate, you need to know the Fico score first. This makes it all the more crucial to review your credit and work on any problems before you are ready to apply for a loan.

Loan type – Even when comparing 30 year fixed rate loans, there are a whole variety of programs available, each to meet specific needs. The pricing changes based on the loan type. Conventional loans (Fannie and Freddie) are good up to $417,000 for a single family home. If your loan is above that you would most likely look at a Jumbo loan. Jumbo mortgages are not able to be sold to Fannie Mae and Freddie Mac, so they are priced higher.

If you qualify best for an FHA loan, the pricing would be different. The same goes with many of the first time home buyer loans like My Community, the Community Home Buyer Loan and the City of Chicago Bond program, or other bond loans.

LTV and CLTV – This means the Loan to Value and the Combined Loan to Value, or how much is the mortgage compared to the value of your home, and how much if you include any other mortgages on that home. This is another way of stating how much equity you have in your home - the higher the equity, the lower the loan to value. And the less equity you have, the higher the risk is to the lender. Part of this risk is taken up by having mortgage insurance for loans with less than 20% equity, in some cases it is taken up by higher pricing.

Are you buying with a second mortgage added on? In the past this has been a great way to buy with less money down and avoid mortgage insurance. It is harder to do in many cases now, and you may pay more on your first mortgage if you have a second loan attached.

Loan purpose – Are you buying a home or refinancing? If you are refinancing your home and taking cash out, it would cost you more if your loan to value is greater than 70% (less than 30% equity).

Occupancy – Is this your primary residence, a second home or an investment property? You get the best rates and fees for your primary residence. Second home loans are often the same, but in some cases they can be slightly higher. Investment property is looked at as a riskier type of loan and investors are more likely to walk away from a bad investment, than home owners are on their homes. So there are higher rates and fees when you buy non-owner occupied or investment homes.

Type of property – Mortgages for single family and two unit homes are priced better than loans for three or four unit homes. Buying a condo may also mean you pay a little more, depending on the loan program and your loan to value. Especially if it is a new construction condo or a condo converted from rental units.

Loan amount – On conventional loans, pricing is usually better for larger loans. It costs the same to process and close a small loan as it does for a larger mortgage. Because of this the pricing improves on loans over $200,000. On the other side, loans under $100,000 have increased fees, and the fees go higher as the loan price drops.

Documentation type – Pricing is better for loans where you show documentation to prove your income and assets than if you took on a loan with less documentation. These loans aren’t as big of a factor in the market as they were a year or so ago.

Property location – There are some areas in the city of Chicago and in the Chicago suburbs that are considered target areas. These neighborhoods are targeted for redevelopment and banks are encouraged to lend in these areas – more than encouraged, they have to have to lend a certain amount in low income areas or they could face big problems with the federal government. Because of this pricing in these areas is better. The original idea here was to offer more homes for low and moderate income borrowers. Often the areas marked for redevelopment are the hot areas where prices are rising. Make sure your loan officer checks to see if you are in a CRA or targeted area.

Buying out of state the pricing can be different, too. I specialize Illinois Mortgages, but also close loans in most states. The wholesale lenders have different rates for each state.

Length of the rate lock – You will get slightly better pricing for a 15 day rate lock than if you locked your rate in for 60 days.

Escrows – Mortgages are usually priced so that the end lender will hold your escrows for taxes and insurance, collect 1/12^th of the payment from you every month and pay the bills when they come due. Many borrowers want to pay these bills themselves and earn the interest on their money until the bills come due. You can do this if you meet certain guidelines, but it will cost you. Most lenders charge a quarter point fee if you waive your escrows. On a $300,000 loan this is an extra cost of $750.

Pre-payment penalty – If you know you aren’t going to be moving or refinancing for a while, you can sometimes get a lower rate by agreeing to pay a pre-payment penalty. This will lower your costs, but it also handcuffs you into staying in the mortgage. If you end up moving or refinancing before the time expires, it could cost you a lot.

These are some of the things that factor into the rate and cost of a mortgage. Even bigger though is how the loan fits your needs and what you qualify for best. It doesn’t make any sense to shop the rate on a conventional mortgage if you can only qualify for FHA. Also, make sure you look at the bigger picture, not only the interest rate but the costs of the loan and how the financing works for your personal situation.

I’ll have more on what you can do to make sure you get the best rates and fees when shopping for a loan in upcoming posts.

Illinois Mortgage Rates and News

Chicago,IL - Dave Weiss of Serious Real Estate - Chicago Real Estate Marketing and Sales had an interesting post on Why Advertised Mortgage Rates are Never Right. This is one of the dirty truths in the mortgage business. Mortgage ads are everywhere, on the Internet, spamming your email, in newspapers, billboards, radio – everywhere. These ads either show an unbelievably low interest rate, or they claim that they will get you the best mortgage rates. Like Dave said, they are almost always wrong. Mortgage rates quoted in newspapers and news articles are just as likely to be wrong. Why is this? There are several reasons:

1. When mortgage rates are given in news articles they are usually linked to some kind of national survey of what lenders are charging, like the Freddie Mac weekly mortgage rate survey. Here the problem is a matter of comparing apples to oranges. The survey tries to standardize the rates and fees across the nation. The Chicago area is one of the few places where we don’t customarily charge a 1 point origination fee, so the rates here will be slightly different than the survey rates which have more fees built in.
2. Everyone, whether they are a mortgage banker a mortgage broker or a bank, fund their mortgages through the same sources. Because of this mortgage rates should be very close from one lender to another. The purpose of advertised rates is to get the phone to ring and it quickly becomes a game of who can lie the most convincingly. I’ll cover this more.
3. Mortgages are priced-out based on a whole range of factors, so a true mortgage rate quote has to take into account your specific situation and your individual needs. There is no such thing as a one-size-fits-all mortgage. I’ll cover this in depth, too.

In this post I’ll look at the darker side of the issue, why companies advertise rates that are wrong from the beginning. This is way too common. The truth is that all mortgage lenders are pulling money from the same sources, Fannie Mae and Freddie Mac for conventional loans, and various Wall Street syndicators for Jumbo and niche product loans. This means that all mortgage lenders have close to the same cost of money. There are differences in business models (this will be another post) but the net costs of processing and funding a loan is also similar with all lenders. In the real world rates should be close to the same from one company to the next. Different lenders go in and out of the market, but it’s rare for a lender to be more than 1/8 or ¼ of a point better than the over-all market.

So how do the lenders in the newspaper offer rates that are way below the current market rates? Some of it comes to twisting the facts, and some of it is out right lying. If a mortgage lender is relying on advertising to bring in prospects, he needs to have a reason for a potential buyer to call in or click on his ad instead of any of the other places they could get a loan. Because the ads all focus on rate, the one with the lowest posted rate will get the most phone calls. So what do they do when their rates are no better than anyone else’s? They increase their fees to make up for their lower rates, they quote lock periods too short to close the loan, they include pre-payment penalties, they price out adjustable rate mortgages and call them fixed rates. And they lie.

Ads in the newspaper are placed days ahead of time. To make the Sunday Chicago Tribune, an ad has to be placed on Wednesday. The mortgage market changes every day. A rate quoted on Wednesday is obsolete and ancient history by the time a potential home buyer sees it on Sunday. If the market has improved in that time, the rate might be in the ball park. If the market stays the same or gets worse, then the lender says that the rates have changed. But now he has a buyer on the phone, and he has a chance to sell them something. This is the used car salesman model of mortgage broker (though big banks have been known to do the same thing), but because so many people focus only on the interest rate, it’s a big part of the market.

I don’t claim to have the lowest mortgage rates in Illinois, though I know they are always in the market range. But making a decision on where to get a mortgage covers a lot more than who has the best mortgage interest rate. You need to look at the entire package. Not only how low the rate is, but is it the right type of loan for you? What are the costs of the loan? Do you feel comfortable with the loan officer and believe that he is truly working in your best interest? Does your loan officer return your phone calls and follow through when he says he will? What is the reputation of the company? Do you know anyone who has worked with them? Will they be able to close your loan on time and at the rate they promised? Do they show everything upfront and on paper? If you make the wrong decision, the lowest interest rate could cost you a lot of money.

My goal here at Illinois Mortgage Rates and News is to make the process as open and transparent as possible. I publish Illinois mortgage rates every Friday, and the rates I show are true rates that I will stand behind. These rates are real, still, they won’t apply to every situation. The only way to know exactly what rate you would be able to get is to have a loan officer talk with you and go over your full situation.

In my next post I will cover all the different factors which impact your mortgage rate.

Illinois Mortgage Rates and News