Mortgage Rates - What Really Drives Them?

Mortgage rates are determined by a number of things.  From the most basic view, interest rates (or yield for those who are receiving a payment for their investment) are determined by the price of the underlying bond.  Rates move inversely to bond prices which means that as prices go up, rates go down and vice versa.

The question then becomes, what drives bond prices?  There are two things that drive the price of any investment:  1) technical analysis of the investment (mortgage bonds in this case) and 2) the fundamentals of the investment.  The technical analysis has to do with the outside factors that are influencing price movement.

Technical analysis of a specific mortgage bond is about a number of things including trends, moving averages, support and resistance levels, and the RSI - relative strength indicator, and support and resistance levels.  Investors look to see if they think the bond has sold off to much too quickly in which case they may start buying.  If many investors think there has been too much of a sell-off and start buying / investing in the bond, it drives the bond prices up.  Usually the institutional investors are the first ones to start buying and their big dollars start moving the market.  As little investors see the price moving up, they don't want to miss out on the opportunity so they jump in pushing the price up even further.  As the price increases, the RSI rises and ultimately gets to the overbought threshold - this threshold may change if the market makes a significant move and breaks strongly through the resistance levels.  At some point, the institutional investors are happy with their return and want to take the profits off the table; they don't always look for a big move since the dollar amount they are investing is so large that they can make a lot of money on small moves.  Below is a snapshot of the charts I look at to try to determine what rates are going to do.

As the institutional investors start selling off they drive the prices down (and the interest rates begin to rise again).  The smaller investors don't want to miss out on taking profits OR they get afraid that they are going to lose money as the price goes below what they bought it at so they sell as well driving the price down even further.

Fundamental analysis regarding bonds comes mostly from economic data (fundamental analysis of a company is about that company's numbers - gross revenues, profit, profit margin and such) as well as the experts' interpretation of the data.  The bond market as a whole is greatly influenced by what is going on in the general economy; a strong or improving economy usually encourages investors to shift money out of the safe-haven investment of bonds and into more risky, but the potentially higher returns of equities (stocks). The idea is that if the economy is doing well, companies like Apple and Amazon will do well which will drive the stock price higher.  When the economy is struggling, people will spend less which means lower profits for these companies and stock price deterioration because investors will sell off equities and move back into bonds - driving prices higher and interest rates lower.  At a point where interest rates are significantly low, there is no real attraction for investors to buy bonds so sometimes the money is parked in cash.  This is the cycle of investing.

Mortgage rates have been climbing for a couple of reasons:  1) Bernanke and the rest of his Fed cronies have been talking about tapering the Quantitative Easing program and ultimately ending it with a target of mid-2014, and 2) the economy is showing signs, albeit weak, of improvement.  As noted above, money begins to shift from bonds to stocks as investors begin to believe that the economy is gaining its footing.  I expect mortgage rates to trend up for a while because of improving economic data and because the upward price pressure on bonds due to the Fed's monthly purchase will be going away which will allow the bond prices to come down and necessarily push interest rates higher.

If you want the best opportunity to get the best interest rate, it is important to work with a loan officer who 1) understands what moves interest rates, and 2) has real-time access to the mortgage bond market so that they can see the trends and be ready to move at a moment's notice, sometimes before rates change even though the bond market has made a significant move.

Feel free to comment, ask questions and share this with your friends.

Reverse Mortgages - What's the Deal?

Reverse mortgages can be a great option for home buyers and home owners 62 years of age or older.  A reverse mortgage allows the owner to stay in his home until he dies without having a mortgage payment (other than taxes and insurance).  Hence, if your monthly budget is tight and making that mortgage payment is a struggle, a reverse mortgage may be the solution.

Homeowners who own their home outright or have considerable equity can refinance into a reverse mortgage and either pull out a lump sum, set up a monthly draw for a specified period or do both all while getting rid of their mortgage payment.  For those retirees who may be relocating to a retirement destination, they may find that a reverse mortgage is the best way to finance the purchase of their new home.  They may have sold a home and have enough money to either pay for a home in cash or to put a large down payment on the home after which they would have a monthly payment on a traditional mortgage.  Rather than tying up so much money in a home, they could put down the minimum requirement (as little as 20%) and keep the rest of their money for other needs, including having it to augment their income.

Here's an example:  a retiree on a fixed monthly income of $4,000 with a $1,000 mortgage payment could free up that $1,000 by switching to a reverse mortgage and he could possible get money out for a family vacation or to help his children get into their first homes, for an investment or any other number of reasons.  A reverse mortgage isn't for everyone but it can certainly alleviate financial obligations for those who qualify and have a very tight budget.

There are down sides to a reverse mortgage and nothing is for certain.  When considering a reverse mortgage, it's important to get all of the information regarding the various mortgage options and analyze them with regard to your specific situation.  You can learn all about them by visiting HUD's reverse mortgage site.

If you would like to know if a reverse mortgage is right for  you or someone you love, please contact a loan consultant who understands how reverse mortgages work.  I'm licensed in California and Nevada and would be happy to help anyone interested in these two states.  Feel free to contact me at 702-812-1214 with any questions you have regarding reverse mortgages or traditional mortgages such as FHA, VA, conventional and Jumbo loans.

Renovation Loans - which one is right for you?

If you have been shopping for a home recently, you have probably been in a few that could benefit from some TLC.  A renovation loan may be just the thing to turn those homes that have been neglected into the home you've always wanted.  Many homes on the market are in some state of disrepair since the owners who have either had to resort to a short sale or a foreclosure haven't had the money or incentive to maintain them.  Even homes that are sold as an equity sale may have design choices that aren't in alignment with your tastes.  So what do you do when you find the perfect home in terms of location, size and floor plan but it is in need of a serious makeover?  You make it into the home of your dreams with the right renovation loan.

There are a few renovation loans to choose from.  FHA has the 203(k) Full and Streamline.  FNMA has the HomeStyle Renovation loan and the HomePath Renovation loan.  The FHA loans are great because the same guidelines apply to these loans as they do to regular FHA loans which means your credit doesn't need to be quite as good as it would for a conventional loan and your job history doesn't need to be as established either.  The streamline version of the 203(k) allows for up to $35,000 in repairs which can include financing the purchase of new appliances (fridges, AC units, water heaters, etc.) along with other energy efficient items.  Borrowers who choose this option usually replace the flooring and countertops, refinish the cabinets, repaint the inside walls and purchase some appliances.  The Full version of the 203(k) allows for more extensive renovation including adding on to the house or reworking the existing layout.  Both types allow for roof, plumbing and electrical repair.  This video will go over the details of the FHA 203(k) Streamline loan and here is one great example of a home makeover that was financed by the FHA 203(k) Streamline loan.

The FNMA HomeStyle Renovation loan is a great loan for borrowers who can qualify for conventional loans and want a loan that will allow them to improve the outside of the home in case you want to add a pool or a patio (very few lenders have access to this loan - we do).   The HomePath renovation loan is limited to homepath loans only so I want go into any detail about them here.  When deciding on what home to buy, your choices come down to whether you are happy with it as it is or whether you would like to make it just the way you want it by using a renovation loan.  Which loan you choose to finance the renovation will depend on several factors that need to be discussed with the loan consultant.  If you are considering a home that you plan to make some improvements to, I would highly recommend using a renovation loan as compared with trying to finance the repairs with a credit card.  Some advantages of a renovation loan include:

1. No appraisal contingencies for deferred maintenance - sellers love this,
2. less competition because many buyers won't consider homes that need much work,
3. lower initial sales price and more possibility for price negotiation,
4. renovation can occur before you move in by a licensed contractor,
5. interest you pay on a mortgage may be tax-deductible as opposed to the interest paid on a credit card which isn't.

One final consideration when choosing a renovation loan as compared to a regular mortgage is who's going to do the repairs.  The videos above go into more detail about this but if your loan consultant has a good relationship with a reputable contractor, that would e the preferable route since that contractor probably knows the timeframes of the loan and what is required so that the loan can be closed in a timely manner.  Check out the videos and see if a renovation loan is right for you.  If it is and you live in Nevada or California, I would love to help you with the financing.  Feel free to comment and share with your friends or clients.

The Mortgage Pre-approval Process

The Mortgage Pre-approval Process
The mortgage pre-approval process is probably the most important thing to a buyer's success in purchasing a home for several reasons.  The first thing this does is let the buyer know whether or not he or she is qualified to buy a home.  It also let's him know the maximum amount he qualifies to buy.  Knowing these things is important so that the buyer doesn't waste his time or the Realtor's time looking at homes he won't be able to afford.  From an emotional aspect, it also helps to only look at homes a buyer can afford rather than possibly falling in love with something he can't and then being disappointed with the homes in his price range.

Getting pre-approved is more than just answering a loan officer's questions so that he can fill in the blanks on the loan application.  It is extremely important to provide the income and asset documentation, along with any other special documentation (HUD settlement statement for prior short sales - read about the short sale, foreclosure and bankruptcy guidelines, bankruptcy discharge papers if the buyer had a bankruptcy, divorce decree for those who are divorced) so that the loan officer can verify the information provided on the loan application and issue a proper mortgage pre-approval.  Income documentation to be verified includes the last two years of tax returns (including business returns for self-employed borrowers) and W-2s and the most recent full month of pay stubs.  If the borrower is retired, proof of pension or investment income should be provided along with Social Security award letters.

Proof of asset documentation requires the potential borrower to provide the last two months of bank statements (all pages) for all accounts along with the most recent quarterly statement for retirement accounts like a 401(k) or a Roth IRA.  The more assets a loan officer can verify, the better.

Once a loan officer has verified all of the necessary documentation, they can provide a letter to the buyer's Realtor stating that the buyer is pre-approved for a given amount AND that the income and asset documentation (along with any and all other pertinent documentation) has been verified.  By providing an approval like this, the seller and his agent will know that there shouldn't be any surprises throughout the process, at least as it pertains to the buyer.  A strong approval letter where the income and assets have been verified is much more likely to get the offer accepted than one where no verification has occurred.  The process is the same for FHA, VA and conventional loans.

The Mortgage Bond Market
The mortgage bond market is up slightly on the day with the benchmark FNMA 3.5 up 16 basis points as of this writing.  The Michigan Consumer Sentiment Index came in at 85.1 after a reading of 84.1 last month and an expectation of 84.2.  All else being equal, rates are better on Mondays than on Fridays since the market has a hedge for what may happen over the weekend.  The next big thing to look for that could move the market is the employment report from the BLS next Friday morning.  It has surprised to the good side the last few times; in fact, on July 5th, it surprised so strongly that the benchmark bond fell 200 basis points on that day - this is a huge move that is equal to about .5% in rate.  We have recovered nicely since then but I would be very cautious about floating a rate into this report.  My recommendation would be to lock it if you have a loan that is far enough along in the process that will allow you to do that.

Please feel free to share this with anyone who may be looking for a loan or needing to go through the mortgage pre-approval process.  I'd be honored to help them obtain financing for their home purchase.  I can be reached at 702-812-1214.  I'd love to see what your thoughts are relative to any of this content - feel free to comment below.

The mortgage bond market, mortgage interest rates and how to avoid mortgage insurance

What's happening in the mortgage bond market:
For the 3rd day in a row the mortgage bond market is down. It climbed 28 basis points from its low yesterday but still finished down 53 basis points or about a .125% increase in rate. One thing we saw was a reminder of the impact Europe has had on the mortgage bond market and the bond market in general. When Europe was reporting bad news, there was a flight to safety by investors to bonds in the US. Europe reported a PMI of 50.4 which shows the economy is expanding - this is the first such report in 18 months. Part of the sell-off in the bond market is due to this report. 

Initial jobless claims came in higher than expected which is good for rates - last month's was 336K, expected was 340K and actual was 343K. Durable goods orders (ex-transportation) also came in lower than expected at 0. The market is shrugging this news off and is currently down 29 basis points. The advice is to lock on any loan closing within 30 days if you are able. 

Why are conventional mortgage rates higher than FHA and VA?
One question that I get asked a lot is why are conventional rates higher than FHA and VA rates.  The answer is that FNMA / FHLMC have guarantee fees which were instituted a few years ago with all of the new legislation that we've seen.  These fees have increased a number of times since they were instituted and I've heard rumblings of another impending increase.  The guarantee fees are why the interest rates are typically about .375% - .5% higher for a conventional loan than for an FHA or VA loan.  On a case by case basis, conventional loans are much more credit score-driven than FHA or VA so a person with a credit score between 680 and 720 may see an even bigger disparity in rate relative to an FHA or VA loan than someone with a score over 720.

General mortgage recommendation:
If you served our country in the armed forces, you may qualify for a VA loan.  If you do, my recommendation is to use that to finance the purchase of your home.  With a VA loan, you don't need to put any money down - you do need money to pay for closing costs but this money can come from a gift.  As mentioned above, VA loans have interest rates close to what FHA rates are and better (in most cases) than rates on conventional loans.  The best thing about a VA loan is that it allows you to put nothing down and you still don't have to pay mortgage insurance.  Mortgage insurance can be a big part of a monthly mortgage payment so having a loan without it means you can qualify for a bigger loan / house or just have a smaller payment which means more cash for savings - we all need to put more money away for retirement.  

An FHA loan, for example has a mortgage insurance payment of $225 on a $200,000 loan and it doesn't offer an option without mortgage insurance.  Conventional loans typically have better mortgage insurance rates than FHA but it's very dependent on your credit score and the best rates (mortgage insurance and interest rates) require a score of 720 or higher.  Conventional loans do have two options that don't require mortgage insurance:  1) a down payment of 20% or more or 2) lender paid mortgage insurance in the form of a higher interest rate - typically about .375%. 

Please feel free to comment or contact me if I can help in any way:  702-812-1214 or jed.wunderli@noblehomeloans.com.    

The Wunderli Team Introduction

I am beginning my new blog under The Wunderli Team and want to start of by introducing myself.  I have lived in Henderson, NV since 1997.  I moved here from Salt Lake City with a wholesale mortgage company and soon became a retail loan officer for a broker.

As a loan officer, I have helped many clients finance their homes with FHA, VA, conventional and Jumbo loans.  I have helped several clients with the FHA 203(k) loan so that they could finance remodeling work.  As a Certified Mortgage Planner, I extend my responsibilities as a loan officer by helping the client choose the best financing for them and their financial goals.  My understanding of the mortgage bond market is due in large part to the training that I had when I worked for Fidelity Investments as a Series 7 licensed representative trading stocks, bonds, mutual funds and options for people on their accounts.  

My goal is to educate clients and referral partners as to loan programs and the current state of the mortgage bond market so that thy can understand their choices and get a feel of when to lock their loan.  Check out The Wunderli Team facebook page for almost daily information regarding the mortgage bond market and what interest rates are doing.  Please like the page so that you don't miss any of the updates and feel free to comment on it and share it with your friends so that they can benefit from this valuable information.

If you would like to know more about renovation loans and how you can finance repairs and improvements in your mortgage, check out The Wunderli Team YouTube channel.  You will find videos that help you understand exactly how the FHA 203(k) works along with videos that share some of the home renovations that have been completed with this great loan.  Additionally, you will find videos of me discussing the mortgage bond market along with my lock / float recommendations.  

For potential clients who are reading this, I want to help you get the right loan with the best terms.  If you have any questions or would like me to provide you with a recommendation for your specific situation, please feel free to call me at 702-812-1214.  

For potential Realtor partners, I want to help you have smooth closings by providing good (honest and timely) communication throughout the process.  I also want to help you grow your business by sharing and implementing some strategies that will help generate new business.