• Recommended Links

What makes them rise? What makes them fall? Is it the Fed? The Economy? Inflation? Banks? The President? Fannie Mae? Freddie Mac? The answer is sometimes complex, but rates are moved by a number of related factors, and believe it or not you are one of those factors!

As interest rates (yields) decline, investment customers can become more or less interested, depending on the direction of economic growth, inflation, appetite for the product and several other factors. Typically, though, the lower those rates get, fewer investors are interested in putting them on their books.

Of course, it’s not always as easy or simple as that. Mortgage market makers serve not one client, but two. They serve the folks who want the highest possible return on their investments and the homeowner / homebuyer who wants the lowest possible interest rate. Simultaneously, rates need to be high enough to attract investors and low enough to attract borrowers. Confused? It can be a complex and confusing dance to understand.

In order to attract investors, sellers of bonds must compete with one another to get their money. They do this by offering a variety of instruments (also called products) with differing structures of risk and return over given periods of time. These offerings compete with other investments which are similar in performance, such as US Treasuries, corporate bonds, foreign bonds, and others.

Investor demand for a given kind of investment plays a considerable role in moving market yields, because investors literally have hundreds of places to put their money. It’s a crowded marketplace with many sellers of various products competing for those investor dollars. Investor demand for specific product rises and falls with changes in investment strategies. If demand falls enough a change must be made to attract investors again. How to attract them again you say? The answer usually comes as a raise in interest rates.

The Federal Reserve Board known as the FED in the industry actually controls interest rate movements to control the economy and inflation. Before 1913 when the FED was created the markets were actually very unstable. They play a crucial role in the economy. If rates are left low for too long then inflation can run out of control so the FED raises rates to counteract this from happening.

Mortgage money can come from many sources, including deposits at banks and brokerages, but most comes from investors through what is collectively known as the “Capital Markets”. This is where investors interested in purchasing certain kinds of debt instruments — bonds, in this case — come to buy those items.

Who are these investors, and why are they so fickle? Mostly, they are people like you and I. They want two opposing things; low payments on your debt, especially your mortgage, and high returns on your investments. You (the investor) will only buy so many low-yielding bonds (mortgage or otherwise) because you will take you money elsewhere if the returns are too low.

Bond prices and bond yields always move in opposite directions. When economic indicators, such as the gross domestic product and unemployment rate, forecast a strong economy, long term interest rates move up. When these indicators predict a slower economic growth, long term interest rates usually decrease. Mortgage rates and long term rates often move in tandem.

In the mortgage business, the word “reserves” has more than one meaning. It can refer to the monies (assets) required by the lending bank - to be on hand in the borrowers deposit accounts at the time the loan closes.

The other form of “reserves” in a mortgage transaction are those monies required by the lender to go in escrow, if one is created.

Although proceeds from the sale of your previous home are not technically “seasoned”, they may be used for the down payment of a new purchase, as well as the necessary closing reserves.

Many banks do not consider state controlled retirement funds when using borrowers deposit records to determine how much cash reserves they have. This is because many state controlled retirement funds are inaccessible to their contributors.

Reserves are assets that a home buyer has after settlement. It is one of four underwriting criteria, as with credit, income, and loan-to-value ratio. Most banks require borrowers to have 3 to 6 months worth of housing expenses in reserve after closing. Reserves do not have to be liquid. They can be in the form non-liquid investments such as stock securities, bonds, retirement funds, etc.

A Verification of Deposits (VOD) is often used to show both source and seasoning of reserves or assets. This is a form that is filled out and signed by an official of the depositing institution that verifies such things as the current balance, daily deposit average, account numbers and other information.

When a lender is asking for seasoning or reserves on assets, this usually is referring to liquid assets such as checking and savings. The lender uses the borrower’s assets as a indicator for measuring the borrower’s ability to repay a loan. The assets also show the borrowers pattern of savings and ability to support financial obligations.

Most lenders want a borrower’s reserves to be seasoned for a minimum of 60 days. Seasoned means that they must show proof that they have had this money for at least 60 days. A lender doesn’t want to see that a borrower just had a large amount of money deposited into their account just recently, or they will require proof of where the money came from along with a letter of explanation. This safeguards the lender that the borrower has not incurred a new debt or loan that needs to be calculated into their debt to income ratio.

Many wonder why reserves are sometimes required. This gives the lender more sense of security when lending you the money for your home. If any life changing situations should occur, and you have 6-12 months of “reserves” available, you are likely to use these funds to make your payments in order to keep your house. This makes you less of a risk in the lenders eyes.

With retirement accounts you may be required to contact your human resource department to get a statement explaining how readily available these accounts would be and what the process for taking any money out would be.

Though a borrowers 401k accounts are used to show these reserves, the money in the 401k account is not actually drawn out it is simply shown to be available.

Fannie Mae continues to tighten up approval guidelines. By putting accurate reserves on your 1003, you actually will receive LESS DOCUMENTATION requirements! Most often, Fannie will only require verification of some of the funds listed, not all (for example, borrowers may have checking, savings, and retirement totaling $12,500, but D.U. findings may need NONE verified, or perhaps only $500 verified…then you do not need to send in all asset verifications, just the $500)Remember - every little bit helps! Checking Accounts count at 100% of balance (recent large deposits may need to be explained)Savings Accounts count at 100% of balance (recent large deposits may need to be explained)Stocks / Mutual Funds count at 100% of balance401k / IRA count at 70% of vested balance Cash balance for life insurance policies count at 100% of cash balance Most other retirement accounts may not count, including pensions, PERA accounts, etc.

You can usually count the cash value of a life insurance policy as well.

Other sites: Mortgage Broker | Negative Amortization | Fixed-rate mortgage | Delinquency | Increasing your homes value | MIP | Stated Income Loan | What not to do after you apply for a Mortgage | Quick Closing | Tips for lowering your homeowners insurance| Pay Option Arm Calculator

A No-Doc loan allows the borrower to apply for a loan and not have to state their income, employment, assets or even submit bank statements. This type of loan is often time appealing to Self-employed, single women who do not have the required two year track record and many successful entrepreneurs who simply don’t want to reveal how much they make. In doing a No-Doc loan the borrower will have a one percent higher rate on average than most conventional loans.

No doc loans are often confused with stated income loans but there is a difference. In a stated income loan the method of earning income must be proven but the borrower is allowed to simply state the amount of that income without providing any proof. A no doc loan means that no documentation at all regarding the amount or the method of earning the income is required.

In some cases a lenders guidelines for a no doc loan even waive the need for a full appraisal, or the requirement that the borrower have the property for at least 12 months before refinancing. This is a useful program for investment property owners who need to draw cash out of the equity of a property that was rehabilitated. Most lenders will not use the new appraised value with out additional documentation and “seasoning” of the property for at least 6 months and usually 12 months.

Individuals who live off of equity and debt investments very often have no means of verifying employment or income due to a variety of factors, and are excellent candidates for no-docs / NINA type loans.

No doc loans are much easier to process than the normal loans. There is very little paper work in comparison and not much to verify.

Past credit history and credit score is very important when applying for a no documentation loan since the lending decision is based on extremely limited information.

A NO-DOC loan is good for borrowers who just relocated, or have recently went self employed.

No Doc loans require the least documentation and are for buyers with good credit. The buyer provides minimal information and the lender does the rest. No Doc loans are great for people who want maximum privacy.

In a soft real estate market, homeowners with no equity in the homes are much more like to default on their mortgages. Because of the intrinsic risk of default associated with No Documentation Loans, most lenders require that the home buyer commit a bigger down payment towards the property.

As short term interest rates rises, fixed rate mortgages are become more popular. Fixed rate mortgages are more stable, the payment does not change throughout the life of the loan.

Low fixed rate mortgages in the past have been the highest interest rate of any loan product. However as adjustable rate mortgages (ARM) have been increasing the relative increase in fixed rate mortgages has been small. The past popularity of ARMs was that for a small risk you were taking advantage of a huge difference in interest rate. It is just not the case any more. Fixed rate mortgages are becoming more popular because ARMs still have the same possible risks but little or no difference in rate. While ARMs generally still have lower rates that may not always be true, and has not always been true. It is possible and has happened in the past that fixed rates were lower than some ARMs.

A low fixed rate mortgage is great for borrowers who plan on staying the home for a longer length of time.

Low Fixed Rate Mortgage Loans are loans that are eligible to be delivered to FNMA/FHLMC, which in turn are sold to investors as low risk, income producing investments. Since low fixed rate mortgages can be sold on the secondary market immediately and banks can recoup their capital investments shortly after making the loans, and do not have to take 30 years to collect on their investments, all lender banks, regardless of their market capitalizations, offer this type of mortgages, thereby making the Prime Loan (Low Fixed Rate mortgages) market highly competitive. The underwriting guidelines of Low Fixed Rate mortgages are more stringent than other types of loans. In order for a loan applicant to qualify for the lowest fixed rate mortgage available, he should have a very good credit profile, preferably with credit scores of over 720 and without any adverse credit history. He should also be able to prove that his gross income is at least 2.5 times the total debt, including the proposed mortgage payments. He must also prove that he has enough money to put at least 20% of the house value as down payment, cover all closing costs, and left-over reserves equaling 3 to 6 months housing expenses after settlement. For homebuyers and homeowners who do not meet one or more of these criteria, many banks offer alternative loan programs.

If your current loan program is ARM (Adjustable rate mortgage) it might be a good idea to take advantage of the current low fixed rate mortgage and stop worrying about ever increasing rates.

A low fixed rate mortgage is nearly an oxymoron. Borrowers should realize than a 30 year fixed mortgage offers protection against rate increases, however this protection comes with a price. A 30 year fixed will have the highest interest rate of any loan product on the market.

Low fixed rate mortgages are best suited for the long term borrower. Although it seems most borrowers want a low interest rate for a long term, it is more likely to get a lower rate with an ARM (adjustable rate mortgage) product as the lender will tend to raise the rates for longer term loans.

Low fixed rate mortgages with the lowest rates are usually only offered to borrowers with excellent credit and who have a 20% or more down payment.

Most people leave money they could use for investing sitting in their house in the form of equity. That’s right, you can refinance your house and place your cash in a growth fund. Did you know that you can actually gain wealth faster by doing this even if you are only receiving the same return on your money as you are paying in interest on your mortgage due to tax write-offs on mortgages?

If you invested in and only make 1/2 more than you are paying, you will have accumulated enough in your side account to pay your home off years early. Or continue to contribute for thirty years and you will have hundreds of thousands more the pay off of your home. Of course everyone’s scenario will be different. Consult your financial pro.

When investing with your home’s equity you are in a sense becoming a bank. Think about what it is that a bank does. It borrows money at one rate and invests it at another, hopefully higher rate. Keep in mind that banks are operated by highly trained and skilled investment managers and risk evaluators. It would be advised that you have a solid plan and work in conjunction with skilled investment professionals before becoming “a bank” with the equity in your home.

Historically, investing in real estate has had the highest rate of return on average. Many homeowners have discovered that they can build wealth much faster by cashing out the equity in their current residences and purchasing investment properties. Lets assume an investment of 20% on a property (20% down payment), and that the property increases in value at an average rate of 4% annually, that translates into a 20% annual rate of return for the amount invested. With property value increases in the double digits as we have seen in recent years, it is not uncommon to see annual rate of return on investments above 50%.As with any other investment strategies, there are risks associated with cashing out home equity. However, one can minimize some of the risks. By making certain that he can afford the new, increased mortgage payments without depending on the income from the investment, the homeowner would not be in a financial tight spot regardless how his investment performs in the short term.

Equity in a home does not make you money by just sitting there. In fact, if the value of your property decreases, your equity is lost. By cashing out the equity and placing those funds in an investment with a higher return than the interest you are paying, you will make money from your equity.

Always contact an accountant to make sure a scenario works in your best interest.

Lenders sell money. That’s their business. They provide money to people who need capital. They charge interest, but you don’t have to make the assumption that interest is your foe. Many major corporate, financial and even church institutions use debt management to accomplish their goals, even though they may have plenty of assets earmarked to cover their liabilities For these institutions, debt is a wise and prudent money-management tool. It’s easy to see if a bank can borrow money from the Federal Reserve at 4 or 5 percent then turn around and lend that money at 8 percent, the can make a handsome profit, especially on large sums. By separating the equity from your home, you can accomplish the same thing.

There are programs that allow you to transfer your equity into other investments without paying any taxes.

Other sites: Loan Officer | AFTER BANKRUPTCY APPLYING FOR CREDIT | Delinquency | Fixed-rate mortgage | Credit FAQ | What not to do after you apply for a Mortgage | Due-on-Sale-Clause | What not to do after you apply for a Mortgage| Pay Option Arm Calculator

Buying a house is much different than buying any other asset such as stocks, bonds, or mutual funds. There are more costs associated with buying a house and it will most likely be the biggest debt you take on in your lifetime. Buying a house has many tax advantages. To buy a house you will need to adhere to a simple process and it will take some effort on your part to ensure that the house buying process is smooth.

Perhaps the biggest part of buying a house is the financing. There are very few all cash offers. So take the time to work with someone you trust will do a good job. Make sure whoever you work with is familiar with all the expenses of owning a home. There are hidden costs to homeownership and your Mortgage Professional should be able to help you uncover those that will apply to you. If you need a first or second opinion you can always call me at anytime!

Buying a house is one of them most important decisions you will make in your life. Homebuyers should have a plan when deciding on purchasing a home. This plan should take into account their present situation and also future plans. Having a plan when buying a home will save buyers headaches down the road.

Make a budget and track all of your spending. See what you can live with and without. Then as you look at your budget, ask yourself if you can afford all that comes with a home, i.e. taxes and insurance. If you feel it’s right for you, then seek out a highly qualified mortgage professional.

It is very common for people to buy houses that they can qualify for, however they may end up way to expensive for the borrower. Just because you can qualify for a home worth $500,000 does not mean you need to buy a home for that amount. Have your mortgage professional provide an idea as to how much your payment would be on that mortgage. You know your finances better than anyone else and you know what your financial goals are better than your mortgage professional too. If you are trying to put 20% of your monthly income away towards investment and/or retirement accounts it probably would not be a good idea to buy a home that gives you too high of a monthly payment to continue to allow you to keep making your investments toward retirement. Know how expensive of a home you can afford while still allowing you to maintain a lifestyle that you are used to, and the financial goals that you desire. Work with a local mortgage professional to find out how you are able to qualify for a home and still keep your other finances steady and unchanged.

Think about how the house is going to fit into your overall lifestyle. Start by thinking about your situation in your career and personal life. Are you really ready to buy a home if you found the one you liked? How much space do you need to have? What areas of the community are you attracted to? Make a needs and wants list and to better prepare in finding a home that fits you, not the other way around.

Even if you aren’t going to buy a home right now, it is still good to educate yourself about the loan process, and what goes into getting a mortgage. It isn’t a simple process that can be completed in a few days. It usually takes around a month, and sometimes longer. You should have a trusted mortgage professional in mind ahead of time, so that you know who to go to when you are ready to buy a home.

The first thing you need to do is ask yourself “Am I ready to buy a house?” If the answer is yes, then you will need to contact a local mortgage professional that can pre-qualify you. The prequalification-qualification will tell you if you are able to purchase house, and the price range in which you should be looking. The mortgage professional will only give you an idea of the price in which qualify. Remember that you are the one who has to make the payments every month, and you are the one who has to feel comfortable with that payment. If you are in need of becoming pre-qualified, feel free to email me at .If you are not ready to buy a house, that is ok too. Purchasing a home is something that has to be done when you feel like you are ready for the responsibilities that come with home ownership.

In some states, it is customary to have attorneys handle real estate transactions. For home buyers in those states, to protect what may be the largest investment in life, it is prudent to hire a lawyer experienced in real estate transactions soon after the subject property is found. Some of the attorney’s responsibility include drawing up the contract, ordering title search on the property, and accompanying the buyer to the settlement.

You should always bring your loved ones or the people who will be living with you as to get their opinion if they like the house as well. Since a home purchase is not something you can change your mind on after you remove contingencies without losing deposit money.

• GET PRE-APPROVED: Always speak to a Mortgage Professional first to make sure you know what you can qualify for.
• BEGIN VIEWING HOMES: Work with a reputable Real Estate Agent to find the right home
• PUT AN OFFER: An offer requires Earnest Money so be prepared to put money down
• REVIEW LOAN OPTIONS: Today there are many loan options to choose from, discuss them with your Mortgage Professional
• GET HOME INSPECTED: If your home has problems, you want to identify them immediately
• GET HOME APPRAISED: An appraisal gives your home a monetary value
• CLOSE ON YOUR HOME AND LOAN: There are two separate closings, changing ownership and closing on your loan.

Editors Note: Due to the mortgage and credit crunch, Cash-Out Refinances may be harder to obtain. If you’re in need of a Denver Refinance contact us to discuss your mortgage options.

With a Cash out-Refinance the money you get at closing can be used for many purposes such as future investments, College, or debt consolidation. Money can be used to pay off current monthly debt which could lower your personal Debt to Income ratio. Consult a Mortgage Professional in regards to how much you should extract from the equity built into your home.

You can get cash out through a first mortgage, a second mortgage or a home equity line of credit (helot). Some lenders will require that you stay within certain loan to value (LTV guidelines) for cash out. Conforming limits are 90% LTV and FHA cash out is limited to 85% LTV. Many subprime lenders will go to 100% cash out with good credit.

Whenever you take a decent amount of cash out from your home, your LTV (loan to value ratio) will probably exceed 80%. To avoid paying mortgage insurance on these loans, many borrowers split the amount borrowed into two loans, a first and a second. Typically, the first mortgage has a LTV of 80%, but there are loan programs where having the first mortgage at 70% LTV offers more favorable terms to the borrower. The lower the LTV ratio, the less risk the lender will have in offering you a loan.

FHA update on October 31, 2005 allowing for a cash out refinance to go as high as 95% LTV. Previously the guidelines only allowed for a maximum of 85% LTV. These changes will allow many borrowers to take advantage of the equity in there homes and still obtain low rate financing.

Taking cash out on a home refinance is one of the many factors a lender takes into account when evaluating the risk of the loan. In certain situations, taking cash out may cause the lender to perceive the loan to be of higher risk. This could result in a slightly higher interest rate or additional restrictions on qualifying for the loan.

Since payment on cash out refinances can be spread across over up to 40 years, it is often advisable to use the proceeds for investing in something enduring. Using cash out from home equity for Value adding home improvements or for financing a new business are excellent options whose benefits you will continue to reap long after the last payment is made.

Besides setting the maximum LTV limit with Cash-Out Refinances, some prime lenders also limit the maximum cash-out dollar amounts.

Some non-conforming lenders will allow cash-out up to 125% of the value of your home.

Cash out Refinances can help many people better their financial situations by improving their monthly cash flow. However, many of these borrowers after paying off high interest rate debts often find themselves in the same situation down the road because of a failure to control their use of credit. These people wind up being in a worse situation because now they have no equity in their home plus high interest rate debts to pay.

If you’re looking to take out unlimited cash out when refinancing consider a rate and term refinance of your first mortgage and a home equity loan second mortgage option. Taking cash out proceeds from your second mortgage allows you to get a better rate on your first mortgage.

There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.

Leveraging Your Property. In order to understand why you’d want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here’s an example:

If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.

Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.

It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the rate you’d pay for a mortgage in today’s rate environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

• Denver Lender LLC

  We are a mortgage company located in Denver, Colorado. Click here to compare mortgage rates.
  

• Search for:

• Tags

  adjustable rate mortgage appraisal colorado commercial compare consolidation construction conventional credit score debt denver fha first mortgage first time home buyer fixed rate mortgage foreclosure home equity home equity loan home loan investing jumbo lending loan amount meltdown mortgage mortgage backed securities negative amortization prepayment prime property purchase rate rate increase real estate refinance reverse mortgage second mortgage shopping stated income Subprime va value

• Recent Posts

  • No Country for Mortgage Brokers
  • File under…
  • Monday Morning Quarterback
  • Keeping up with…
  • Video: The Subprime Meltdown of 2007
  • Pavilions, Argonaut, and more
  • Why don’t we save?
  • Spanning the web
  • Mad World
  • What will 2008 bring…

• Legal

  The content provided on this website is presented for informational purposes only. The information provided on this website should not be construed as offering legal, financial or other advice to be relied on by the reader to make or refrain from making any decision or to take any action. The investment, mortgage or financial services or strategies mentioned in and throughout this website may not be suitable for you.