Mortgage Rate Forecast: June 2008

Many people are usually faced with deciding between a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM), and sometimes aren't sure which direction to take. This little handy guide should help you formulate your decision.

ARMs have lower payments in the early years than FRMs. But, they expose you to the risk of higher payments in future years. Select an ARM if you cannot afford the payment on an FRM, or if you confidently expect to be out of the house within 5 - 7 years. If you aren't sure if you might be out of your house within 5- 7 years, then select the FRM.

If you can afford the payments, and a) expect to have the mortgage 7 years or longer; or b) have a strong preference for payment stability, then select an FRM. Select an ARM if you cannot afford the payment on an FRM, or if you confidently expect to be out of the house within 7 years.

If I Select an ARM, Which One Should I Choose?

If you are selecting an ARM in order to make the payment affordable, try to avoid the riskiest ones with initial rate periods of less than 5 years. If you are selecting an ARM because you expect to pay off the mortgage before the initial rate period is over, leave yourself a margin for error. If you expect to be out in 6 years, for example, take a 7-year rather than a 5-year ARM.

The Options ARM (sometime referred to as Pick-A-Payment or Negative Am loans) is for borrowers who want to purchase as much house as possible, but need the flexibility in making monthly payments. Typically, this type of loan is for people who work on commissions, own their own business, or expect larger increases in income in future years such as doctors and other professionals. Options ARM loans provide the lowest initial payment of any ARM, but also present the greatest risk of future payment increases and negative amortization.

If I Select an FRM, Which One Should I Choose?

FRMs vary by term, which is the period used to calculate the mortgage payment. FRMs range from 10 years to 40 years. The longer the term, the lower the mortgage payment but the slower you pay down the balance. I do not recommend 40-year loans because they carry a penalty rate. If you need a lower payment, I recommend that you consider the 30-year FRM with an interest-only option.

The 30-year and 15-year FRMs are the most popular by far, and the price of the 15 is always below that of the 30. The price of the 20 is usually between that of the 15 and the 30, but it is closer to the 30, and sometimes more! The 10 is usually priced a little lower than the 15, but not always.

The selection process should start with the 15 because it is the best deal around for borrowers who can afford the payment. Most of those who can't afford it opt for the 30 because the payment is substantially lower.

The 20-year term is for borrowers who want to pay off as soon as possible but can't quite make the payment on the 15 year loan. An interest-only option is not available on 15s, so that is not an option.

If you're considering a 25 or 30 year term, consider a 30 year instead and ask for the payment schedule to pay down in 25 or 30 years. Not only will you have an easier time qualifying for the 30 year mortgage, but it will give you some flexibility in payment in case you need it if you're going to pay back on a 20 or 25 year schedule.

Some borrowers who can make the payment on a 15 are persuaded to take a 30, or even a 40, in order to invest the difference in cash flow. I don't recommend this because making it pay requires a very high rate of return on investment.

Mortgage Commentary

As expected, mortgage rates increased slightly last week.  Rates continue to be pulled up by rising inflation which is fueled by rising energy costs.  Just like gas prices, we don't expect much relief any time soon.  However, unlike gas prices, rates are still historically low.  We recommend getting locked now before they get out of control.

The fear of inflation continues to drive long-term rates up despite what the Fed would like to see, and once again we see the Fed has no control over long rates. The current rise in prices for oil and food staples show no signs of letting up, and if this continues, so will the fear of inflation and higher rates.

I hate to beat a dead horse, but inflationary concerns will continue to impact key aspects of the overall economy, which will have a trickle-down effect. The Fed is in a very tough position and will not likely raise rates to combat inflation in a recessionary environment. The end result is mortgage rates moving higher.

Still, the modestly stronger growth story from two months ago isn't a reliable indicator of where we presently are, or especially where we'll go from here. Economic prospects remain dicey, even when boosted by usual and unusual actions by the Federal Reserve, which expanded the Term Auction Facility again for June and is now making some $225 billion available in three separate auctions instead of $150b in two. By no means are financial markets out of the woods yet, even if we're cheered by a pickup in growth.

This week brings us the release of a couple important pieces of economic data in addition to some moderately important reports.  There are a total of four or five reports that are worth watching and are most likely to affect mortgage rates. The big report is the one covering employment, which should be mildly negative. Wide-ranging survey of factory and service-business activity from the Institute of Supply Management are due, too, along with vehicle sales (likely poor), Construction Spending and estimate of worker productivity. Inflation may have won the day last week, but the collective tenor of the reports from next week will probably be a weak one, sufficient to cap this week's rise and keep rates pretty steady.

Overall, look for Friday to be the most important day of the remaining week with the release of May's Employment figures.  This morning's data failed to drive bond prices or mortgage rates in any direction, but Friday's data most likely will. If we see stronger than expected readings Friday, I expect to see mortgage rates close the week higher than this morning's levels.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

Search today's mortgage rates anonymously. And, as always, you can call me at (508) 471-4144 with any questions about mortgage rates and to discuss your best loan options.

Looking Back

Interest rates ended up last week on mostly better than expected economic news. The word of the week was inflation.

In other news, New Home Sales were unexpectedly up 3.3% in April, which came in better than the planned drop.

Mortgage application volume is down 6.8% overall from a year ago. However, purchase applications are down a staggering 17%.

Looking Forward

The coming weeks are looking like a steady, if gradual, increase in mortgage interest rates.

The feeling among analysts is that the Fed is probably through with their rate drops.  They will probably begin slowly raising them again by year's end in an effort to stem inflation. 

How Does a Divorce or Separation Affect the Family Home?

Separation and/or divorce can be stressful enough, especially when dealing with the marital home, usually the greatest asset to be dealt with. 

When a couple decides to divorce, the stress of dealing with financial issues can be overwhelming.  As a result, you should seek advice from an expert to educate themselves on their options as early in the process as possible.   

The biggest issues surrounding the home are:

• How is the title currently held?
• Will the marital home be sold?
• If not, who will retain possession?
• How will the vacating spouse be compensated?
• How will the compensation be determined?
• If there is equity, how will it be assessed?
• What type of loan programs are available?
• What if one spouse has been out of work?
• What are the tax implications of a refinance or sale?
• Can the vacating spouse qualify to buy another home?  

By coordinating the efforts of real estate agents, mortgage planners, and both parties involved, answers and solutions can be reached to appease both parties.

Current Rates*:

• 30 Year Fixed - 6.50% with 0 Points
• Jumbo 30 Year Fixed - 8.0% with .5 Points
• 15 Year Fixed - 6.125% with 0 Points
• FHA /VA 30 Year Fixed - 6.375% with 0 Points
  
  *Rates and fees accurate as of 5/30/08. Rates and fees subject to change without notice.  This is not an advertisement for the purposes of the Truth-in-Lending Act or Regulation-Z. Terms and conditions apply. For qualified borrowers. Not a promise to lend.

My Lock Advice:

If I were considering financing/refinancing a home, I would...

• Lock if my closing was taking place within 7 days
• Lock if my closing was taking place between 8 and 20 days
• Lock if my closing was taking place between 21 and 60 days
• Lock if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.