How to Secure a Mortage in Todays Market

Friday, 06 June 2008 13:15 Written by Administrator Last Updated on Friday, 19 March 2010 09:56

How to Secure a Mortgage in Today's Market

By Darold George / Blue Water Mortgage Co./ You Magazine

During the housing boom, shopping for a mortgage couldn't have been easier. Mortgage interest rates were low, credit was a breeze, and the sheer volume of mortgage products made buying or refinancing a home a cinch, even if you had credit issues. All you had to do was call up a few mortgage companies, ask for a quote, and choose the lowest one. It was really that easy.

This is no longer true in today's volatile market. Sure, interest rates are still very low, and there are a lot of great deals in real estate right now. But lending guidelines are much tighter, the number of mortgage products has significantly diminished since the subprime collapse last summer, and if you have credit issues, there are simply fewer affordable options these days, thanks to risk-based pricing.

With so much at stake, you need an experienced, educated mortgage professional who can help you lock in the right interest rate on the right mortgage product for your individual financial goals and needs. Anyone who quotes you a rate over the phone or the Internet without asking anything about you, your family, your finances or your lifestyle, clearly doesn't have your best interest in mind.

Unprecedented Volatility
Stocks and bonds all compete for the same investment dollar. When stocks are increasing in value, investment dollars are coming from the sale of bonds. When bonds, including mortgage-backed securities, are sold en masse, interest rates, including home loan rates rise.

Mortgage interest rates are set each day by individual lending institutions and are based on the performance of mortgage-backed securities (bonds) in the secondary market. Because of extreme volatility in the financial markets this year, the performance of these bonds has been extremely volatile as well, especially in the last three months.

In fact, interest rates for a 30-year fixed-rate home loan during this time have vacillated wildly between a low of about 5.25% and a high of nearly 7.00%. On a $300K loan, that's a difference in your monthly mortgage payment of $239.30 or over $86,000 more in additional monthly payments throughout the life of the loan.

Rate swings have been equally dramatic over the course of just a few days, and there were several days this year when rates changed nearly 0.25% in just a few hours! In other words, the low interest rate you may have been quoted over the phone at 10:30 am may not be available at 12:45 pm. In this market, you need a mortgage professional who understands the financial markets and when it's right to lock in the most attractive rate for your specific goals and needs.

Changing the Rules
So, what's changed? Why are the financial markets so volatile lately? In July of 2007, a month prior to the subprime collapse and the subsequent credit crunch, the Securities and Exchange Commission (SEC) eliminated the “uptick rule” for all equity securities, a rule that had been in effect since the Securities Exchange Act of 1934.

For over 70 years, this important rule permitted short sales of securities only at a price above the last sale price. During market panics or crashes, this helped to avoid short-selling companies into oblivion. Add to this rule change, the capability of millions of individual traders to instantly access the markets online, and what you have is a market that more closely reflects the raw emotions that influence financial investment. What's resulted are more violent drops in the market, followed by greater bounces and swing trades – a volatile market that's clearly here to stay.

The High Price of Risk
In January, Fannie Mae and Freddie Mac introduced an important change to the mortgage industry called Loan Level Price Adjustments (LLPA) or risk-based pricing. An LLPA is a fee ranging from 0.25% to well over 5.00% for a specific loan scenario. In certain instances where a borrower's FICO scores fall below 740 and the amount of equity or down payment in the transaction is less than 40%, Fannie and Freddie tack on additional fees.

To protect yourself, always work with a mortgage professional who can explain how the mood in the markets and your specific financial situation can impact your decision to lock or float your interest rate at any given time.

Also, if lower credit scores are an issue for you, your mortgage professional should be able to help you or direct you to someone who can help you improve your FICO scores and your interest rate.

You can no longer simply shop for a mortgage based on lowest interest rate quotes. Today's home buyer needs good advice from an experienced, educated mortgage professional.