The approaching holiday season is typically the time of year when home buyers wind down their search and the market slows until late January. However, as a an active agent in the Los Angeles real estate market I have recently observed a sharp increase in buyer activity due to falling mortgage interest rates. Homes for sale in Los Angeles that have been sitting on the market for several months are finally getting snapped up by buyers at lower negotiated prices. Since interest rates have such a major impact on the real estate market, let’s examine what broad economic effects drive interest-rate prices and how to protect yourself when obtaining a home mortgage.
Photo credit: Lendingmemo
October saw mortgage rates drop to their lowest point of 2014. In fact, rates are still near 16 month lows. The dip has many homeowners investigating refinancing options and many potential buyers looking to guarantee these low rates.
First, let’s look at how mortgage rates are determined by the state of the overall economy and what that means to you specifically when financing. Hint: read the fine print.
The majority of mortgages closed in the U.S. end up being packaged into bonds. Thus, mortgage rates change daily as mortgage bonds trade on the open market.
Bonds pay an annual rate of return to their investors. This rate of return is inversely proportional to the price of the bond. Rates rise when bond prices fall and rates fall when bond prices rise. Consumer mortgages respond in kind.
Stocks and bonds also behave opposite to each other. Bonds sell on positive economic news and rally on negative news. In short, the worse the overall economy is, the better your mortgage rate will be.
October was not a great month for the outlook of the economy. This pushed bond prices higher and mortgage rates lower. There were several driving forces. Not the least of which was the Fed admitting that even though they are winding up their post-crash stimulus programs, they remain cautious about the economic outlook. This caused a big stock selloff, where bond prices went up and mortgage rates down. Other factors were more global, including Europe’s continuingly stagnant economy and fears of the spread of Ebola.
Hopefully now you have a better understanding of what can seem like mysterious swings in mortgage rates. Now let’s examine the smaller and more personal concerns of mortgage terms. No matter what bank, lender or website quotes you a mortgage rate, it’s paramount that you get all of the fees disclosed to you line by line.
Sometimes these line-item fees are not revealed until later in the mortgage process. One easy shortcut to making sure your quote doesn’t have hidden fees is to examine the APR along with the rate. Federal laws require lenders to disclose the true APR of the loan, so consider it a red flag if your lender is not forthcoming with your loans APR details.
The APR calculates your loan’s rate if all the fees were included. So if the APR is noticeably higher than your actual rate, there are extra fees built in. Here’s an example. If your lender quotes you 4 percent on a 30 year fixed mortgage, and the APR is 4.08 or anything close to the advertised rate, you can breathe easy. There won’t be any extra fees in addition to the standard underwriting, credit report, appraisal and title/escrow fees.
So what do you do if your APR is revealed as being much higher than your quoted rate? You’ll need to pay close attention to these additional origination and discount fees. These are also known as “points”.
Mortgage points can lead to some tricky math for you. Make sure your lender walks you through the numbers. Don’t be afraid to ask questions or go over the numbers repeatedly. Points can cost or actually save you a lot of money over the course of a mortgage. You can often “buy your rate down” by paying points.
If you pay 1 point, which is 1 percent of your loan amount, you can lower your rate by 0.25 percent or more. This means your .25 percent lower rate repays the upfront cost of the point in four years, and from that point forward you’re saving.
After you’ve read the fine print and reviewed the APR, you’re ready to lock in your rate to buy or refinance. By locking in the rate, you ensure it for a set number of days. Timing is everything here. You have to submit your application to your lender before you can lock in your mortgage rate, otherwise it’s very difficult to close on time and ensure the rate.
Once you’re ready to buy or refinance, you’ll want to lock in your rate, which ensures the rate for a set number of days. Timing is crucial. If you lock in a rate and you haven’t submitted an application to your lender, then you’re unlikely to close on time for the locked rate.
If you’re refinancing your current home, it’s very important to contact a lender as soon as possible to lock in a great rate. Rates are volatile and fluid, as October proved.
If you’re in the market for a new home, you need to know that a locked rate is tied to both a borrower and a property. So you have to be in contract on a home before you can lock in your mortgage rate. Ask your lender to advise you on the short term outlook of rates, so you know when to expedite the process or when to take your time.
Even though the holidays are approaching, this may a good time to sell your home. There is less competition on the market and increased buyer demand, a perfect recipe for a satisfying sale. Please call me if you would like to discuss a year end marketing strategy to sell your home and start the new year fresh!