This article is intended to help the reader understand the cryptic sounding term mortgage backed securities or MBSs and how they affect mortgage rates. To begin with let us look into what mortgage backed securities are all about.
Mortgage Backed Securities
Mortgage backed securities are simply bundles of mortgages with similar terms, such as interest rates. In other words, when a bank makes a loan it bundles all of the mortgage loans with similar interest rates and sells them to quasi governmental agencies such as Fannie Mea and Freddie Mac or to investment banks or the large insurance companies. These bundles of mortgages or groups of similar mortgages are held and traded by large institutions, in way that is somewhat similar to bonds, stocks or mutual funds.
When the FHA set up its home loan guarantee program the problem of holding on to all of those low down payment mortgages was solved by collecting them into large bundles and holding them as investments under the supervision of what was to become Fannie Mae. Homeowners will pay their principal and interest to the company responsible for servicing the debt. The servicer passes on the income from the loan to the institution after subtracting their management fee.
Big Boys Of The Bond Market
Like all other fixed income securities, the price of one of these MBS bonds is set based on the value of the income stream. Because they have traditionally been seen as safe investments, these bonds are often sold at a price higher than the face value of the bond. For instance, if an investor is buying a bond of $100 he or she will have to pay $101 or more to buy it, which often depends on the yield of the bond. Yield is the rate of return an investor gets on that particular bond. It could be 3%, 4% or 5%. The higher the yield of a bond, the more the buyer is willing to pay for it.
If the demand for a particular bond decreases the seller lowers the price of the bond. On the other hand, if the demand for a particular bond increases the seller increases the price of the bond. In this way we can say that price of a bond is directly proportional to demand. Because the income is constant the variation is in the price to buy and sell the bond. Of course, investors want to understand it in term of what their dollars buy and so, looking at it from that perspective, when yields go down and bond values go up. In the reverse situation, as yields go up, the bonds become cheaper.
Higher Yield Means Cheaper Bonds
The MBS bonds reflect the demand for mortgages in the economy. If demand is for mortgages is increasing then the Fed will respond by increasing interest rates. This increases the income from new lending, which lowers the sale value of existing bonds (to give them a higher yield) as investors pull out of mortgage backed securities to finance other higher income investments.
Inflation also plays an important role in affecting the demand for bonds, which also impacts the mortgage rates. In the event of high inflation, investors often demand bonds at lower rates to cover their margins. In other words, since bonds produce a fixed rate of income it is quite natural for the investors to buy bonds at cheaper rates so that they can buy more bonds with the same investment. Moreover, booming economy forces investors to divert their funds in businesses where they could earn more profit. Thus, sellers often lower the price to attract investors resulting in rising in mortgage rates.
GDP or gross domestic product is used to judge the national economic output. It puts a number to the quantity of all work done over a particular time period; you can consider it the extent of the economy.
Gross Domestic Product Measurement
GDP measures the money related estimation of goods and services that are purchased by the final consumer. It measures the majority of the wealth created inside the borders of a nation. It includes merchandise and services available to be purchased in the business sector and incorporates some non-market activities, for example, training services.
An alternative idea, gross national product or GNP, tallies all the earnings of the occupants of a nation. So if a German owned firm has a plant in the United States, the yield of this industrial facility would be incorporated in U.S. GDP, yet in Germany it is part of GNP.
Not all work is incorporated in GDP. Case in point, unpaid work, (for example, that performed in the home or by volunteers) and underground markets are excluded on the grounds that they are hard to measure precisely. That implies, for instance, that a pastry specialist who produces a roll of bread for a client would help GDP, however the same would not help GDP if he or she prepared the same item for his or her own family.
Additionally, the calculation makes no note of the wear and tear on the equipment, structures, etc. (the supposed capital stock) that are utilized as a part of delivering the goods. Equipment depreciates or is used up but that does not get counted unless you subtract it from GDP. This calculation is referred to as net domestic product.
More Than One Way To Add Up Your Economy
Hypothetically, GDP can be seen in three separate ways:
- The total value added at each one phase of generation, where worth included is characterized as aggregate deals less the estimation of middle inputs into the creation process. For instance, flour would be the middle component and bread the final product; or an architect’s drawings would be an intermediate and the building the final product.
- By including the estimation of purchases made by the final customer. For instance, the utilization of Food, durable goods, and medicines by family units; the interests in hardware by organizations; and the buys of products and administrations by the administration and outsiders.
- Totaling the livelihoods produced by creation for instance, the recompense workers get and the working surplus of organizations (gross adjusted revenue).
GDP in a nation is typically ascertained by the national factual org, which aggregates the data from an expansive number of sources. In making the figuring’s, in any case, most nations take after settled universal guidelines. The universal standard for measuring GDP is contained in the system of National Accounts, 1993, aggregated by the International Monetary Fund, the European Commission, the Organization for Economic Cooperation and Development, the United Nations, and the world.
Homeowners associations, or simply HOAs, are corporations or the legal entities set up by real estate developers in order to maintain the common areas of developments and managing the homes in residential subdivisions or condominium developments.
In today’s market most condominium developments and townhomes have an HOA, which is created after the development has been completed and before sales and occupation of the units has commenced. HOAs take care of everything from maintenance and repairs, and gardening to handling the building insurance and compliance with building code.
Homeowner associations first emerged in the U.S during the mid nineteenth century. They had limited growth until the 1960’s, but due to rapid expansion of homeownership and large-scale residential development, the condominium lifestyle became popular. That in turn further led to the modification of federal mortgage rules to include condominiums and cooperatives.
Features Of A Homeowners Association
- Membership is mandatory for all the property owners in the development
- Members are usually charged a monthly service fee
- The HOA has the authority to enforce the standards of design and maintenance of the development
- An HOA is a corporation with formal rules and regulations
- It is run by a governing board comprised of members that are elected by the property owning members of the association
- The board appoints and supervises a property management company in order to enact and enforce the maintenance issues of the development
- Many HOAs publish a regular newsletter
There are various restrictions that are enforced by these associations, such as parking restrictions, fencing restriction, pool restrictions, and maintenance of the development, as well as many other features controlled by the HOA.
Members often have a love-hate relationship with their associations. It is possible to be annoyed by the rules of the association and still appreciate that an HOA protects the value of their houses and neighborhood.
The rules and regulation are there to ensure maintenance, defining the limits of behavior, such as limiting the color of paint to a predefined, approved palette. They prevent the neglect of units or such things as members who leave vehicles dismantled on the street. However, these same rules can be oppressive, overzealously implemented and overbearing.
Things You Should Keep In Mind
The prospective homebuyers should keep certain things in mind before going for any property under the management of a homeowners association:
- Go through the covenants, conditions and restrictions associated with the property and make certain that you understand and are comfortable with the terms and conditions
- As the cost of HOA dues vary according to the property make sure you have room for them in your budget
- If you fail to pay dues in any way, the association can take legal action to satisfy the debt
There are pros and cons to everything, when it comes to buying it to an HOA maintained development, it depends on the individual whether this type of shared property management is suitable or not. Having an association take care of many of the common functions of a building or development can bring some real practical advantages. The price, as well as financial, is the set of rules and restrictions that come with it.
The first thing to do to improve your credit score is get a copy of your credit report from AnnualCreditReport.com. The three major credit reporting bureaus must give you one free copy per year, so plan to order one every four months. Then use one or more of the following tips to boost that three-digit number that has increasing power over our everyday lives. These strategies will enable you to increase your scores to the point where you can qualify for a mortgage to purchase a new home or refinance an existing home.
- Dispute errors. Mistakes happen. You can dispute errors online through Equifax, Experian and TransUnion. It is important to only dispute actual errors (i.e. bails that have been paid but are still reflected as outstanding, accounts that belong to a family or borrower with a similar name, accounts opened as a result of identity fraud.) Disputing accurate late payments or collection will most likely just result in their being reinstated with a more recent reporting date.
- Negotiate Past Due Collections or Overdue Payments. You can’t deny that you stopped paying a credit card bill when you were unemployed last year. But you can ask creditors to “erase” that debt or any account that went to collection. Write a letter offering to pay the remaining balance if the creditor will then report the account as “paid as agreed” or maybe even remove it altogether. (Note: Get the creditor to agree in writing beforeyou make the payment.) You might also be able to ask for a “good-will adjustment.” Suppose you were a pretty good customer until that period of unemployment, when you made a late payment or two – which now show up on your credit report. Write a letter to Visa emphasizing your previous good history and ask that the oopsies be removed from the credit report. It could happen. And as long as you’re reading the report, you need to…
- Check your limits. Make sure your reported credit limits are current vs. lower than they actually are. You don’t want it to look as though you’re maxing out the plastic each month. If the card issuer forgot to mention your newly bumped-up credit limit, request that this be done.
- Get a credit card. Having one or two pieces of plastic will do good things to your score – if you don’t charge too much and if you pay your bills on time. In other words, be a responsible user of credit. Can’t get a traditional card? Try for a secured credit card, taking care to choose one that reports to all three major credit bureaus. And if you can’t get a secured card, you might ask to become an authorized user. This means convincing a relative or friend to be added to his or her existing credit card account. If you’ve had a checkered financial history, don’t be surprised if you hear the word “no” a lot. But you might luck out, especially if you’re a young person who has no history of poor credit use. Offer to put an agreement in writing stating how much you can spend and how you will get your share of the bill to the cardholder. Then “do your part and use the card responsibly,” says Beverly Harzog, author of Confessions of a Credit Junkie. In other words, don’t buy more than you can afford and don’t leave your co-signer hanging when the bill is due. The point is to learn to use credit responsibly.
- Under-use your cards. Yes, we did just tell you to get credit by any means possible. But don’t whip out the plastic to pay for everything. The “credit utilization ratio” should be no more than 30% and ideally even less. Harzog says that a 10% credit utilization ratio will “maximize this part of your FICO score.” For example, suppose your Mastercard has a $1,500 limit and you routinely charge a grand a month. It doesn’t matter if you pay it all off before it’s due. What matters is the credit bureaus think “Curtis is using two-thirds of his credit! What a spendthrift!” And if you’re a cash-free kind of guy? Then try to
- Raise your credit limit. Ask your creditors to increase your limit, i.e. making that Mastercard good for up to $3,000. Be careful with this one, though: It works only if you can trust yourself not to increase your spending habits accordingly. Otherwise you’ll be right back to using 66% of your credit each month and how will that look
- Don’t close any cards. Canceling a credit card will cause your available credit to drop, which doesn’t look good to a bureau. One way to keep a card active is to use it for a recurring charge such as a utility bill. There’s room for that in your budget, right?
- Mix it up. Using a different kind of credit can make for a modest boost to your score. For example, you might take out a small personal loan from the credit union or buy a piece of furniture or appliance on installment (but only if you’re 100% sure you can and will meet the payment schedule).
- Pay your bills on time. Seriously. Your payment history – including the ones you pay late or skip altogether – makes up a whopping 35% of your FICO score. If you’re absent-minded or merely overwhelmed (Hi there, parents of young children!), then for heaven’s sake, automate your payments. Even better than paying on time is to…
- Pay your bills twice a month. Using too much of your credit limit at any given moment doesn’t look good. Suppose your limit is $3,000 and a month’s worth of havoc (car repair, doctor bills, plane ticket for kid to get to college) means you’ve charged up $2,9000. Sure, you plan to pay in full by the 18thof the month – but until then it looks like you’re maxing out yet another card. Instead, make one payment just before the statement closing date and second one right before the due date. The first will likely reduce the balance that the credit bureaus see and the second makes sure you won’t pay interest or a late fee.
Following these tips will help put you on the path top a better credit score, which means a higher likelihood of qualifying for a mortgage and better rates and terms.
So what do you prefer, something certain, a rate on a home loan that is fixed, while you wait to close on your home? Or would you prefer to take the chance and wait until you are closer to closing before you worry about the interest that you will pay on your homeland?
These can be tricky questions as a small deviation of interest rates one way or the other are likely to have a major impact on the affordability of your new home. That doesn’t mean you will loose everything but $50 or $100 more or less in a monthly budget can make a difference if times are a little lean.
Is That A Bird In Your Hand Or A Snake?
If interest rates are rising and look like they will be even higher by the time you will close on your purchase you can protect yourself by agreeing an mortgage lock. You can protect the rates available now by choosing a lender who will offer to lock your interest rate in now, for when you finally get to close the deal.
Banks and mortgage lenders use the offer of locking in your rate as a way to get business moving. It is a risk for them as much as you, except reversed; they lose if rates go up and win if they go down, when you have locked in your mortgage rate.
How Long Is Your Piece Of String?
The problem with agreeing to a locked rate is that you never know how long it could take to find the right home and most lenders will not lock a rate until you have a home under contract and have received an application. You could get into closing and find a cloud on the title that makes it impossible to complete the purchase. Or the seller might choose an offer they like better after protracted negotiations. Sometimes the house that suits you best just doesn’t come onto the market for a long time, limiting your options.
Mortgage Lock Basics In Summary
If you are worried about losing out on a rate lock you might rush to a decision more than you would do in perfect circumstances. So there may be other factors to think about besides the rate you can lock in and what interest rates are doing.
However, if you prefer to know now what the numbers are going to be in the future, now, you might sleep better if you have this side of one of the most stressful things that a consumer can commit to tied down with a mortgage rate lock.
Two Main Reasons To Refinance Your Home Loan
There are several reasons you might consider refinancing your home loan but it comes down to just one of two types of situations: Either you are getting better terms or taking equity out of your home. The particular details of your situation and of the present market conditions will have some impact but it really comes down to one of these two things.
There are a few reasons that you might think to get better terms but they come down to either the property value increasing or you have gained a larger equity stake. There are good reasons to withdraw equity and there are some less good reasons.
Take Advantage Of Better Terms
You might want to change the payment structure of your loan. If there is a balloon payment that you can pay it off. When you have an adjustable rate that has reset and you can get a fixed rate mortgage that gives you more certainty as the future rates look likely to be more expensive.
Withdrawing Equity From Your Home
A good reason to refinance to withdraw equity would be to invest it in an income property. Another reason might be to pay off a high-interest credit card balance. Or you may be looking to do some home improvement that will increase the value of your home. The poorer reasons include things like taking expensive vacations, buying a boat or a racehorse.
There are plenty of good reasons to refinance your home and plenty of finance companies and banks that will be more than happy to help you do it. The equity in your home can be a useful tool and you can leverage it into smart investments by shopping around for more favorable terms. The secret behind home loan refinance is that over the lifetime of a typical thirty-year home loan you are paying a huge amount of interest.
Some Interesting Facts About Interest
The way that mortgage finance works is that interest in due on the balance of the loan and the rest of your payment goes to your principle. Your initial payments are almost entirely interest. Over the full lifetime of a thirty year loan you will pay almost enough for two houses, even at the current low interest rates.
When you refinance there will be a finance charge that is around 3% of your loan, which is added to the balance. Even so, you could potentially save the price of a couple of new cars by refinancing with a ½% lower rate, which will reduce your monthly repayment.
Faster Repayment Means Lower Rates
If you chose to refinance for a shorter term, say you go from a thirty year fixed rate to a fifteen year fixed rate, two things will happen. First lenders will give you a slightly better rate because they like it when you pay back the loan more quickly.
Second the larger payments on a shorter-term loan will pay down the balance more quickly reducing the interest you pay; you will pay much less interest over the lifetime of the loan. So, by cutting the term in half you will increase your payments but they will not be doubled.
Talk to your bank or finance company to find out the exact numbers. Depending on the present market and your particular circumstances and your monthly budget you could save a considerable amount over the lifetime of your loan.
Your Freedom To Leave Is Their Freedom To Make You Leave
Home ownership is something that makes you feel secure. Knowing that a landlord cannot come knocking and reclaim their property because they want to turn it into a coffee house or studio apartments or just take it back to refurbish and rent to someone else for twice as much. In most places tenancy laws make it much more difficult than it sounds to recover a house or apartment from a tenant, but it could happen.
If you own your home you will probably have to deal with taxes, insurance home loan payment and repairs. In either case, there are hassles and burdens that you have to respond to. So the question is: What are the basic differences and what might make one way better for you than the other?
The short answer is of course that it depends. Renting might be right for you one year and owning another. However, in the United States today the game is tilted in favor of home ownership. That is why around 65% of residences in the U.S. are owner occupied, according to the Census Bureau.
Home Ownership Is Still A Good Deal
Renting gives all of the equity to the landlord if home values rise. You are paying the interest payments for their loan on the property as well as adding to their principle. This got turned around during the property bubble of the last decade. Housing prices but rents did not keep up. So if you wanted to buy a home the interest payments alone were way above market rents. You would have been better off renting at that point in time.
As property values have returned to a more sensible level, rents have caught up. According to the National Association of Realtors, the number of renters paying half of their income or more in rent has increased dramatically. In the urban areas of the country tenants accept high rents as the price to be where they need to be for work, family and quality of life.
The right time to buy is when you are ready. Leasing a rental property lets you keep your options open if you are unsure of where you will be in a year. The costs of buying a home and home loan fees mean that it is a long-term decision, one that ties you down while you wait for your equity to grow enough to cover all of your costs.
Buying And Owning Your Home Made Easy
Financially it usually works out that the cost to buy your home is lower than renting the equivalent house. Government-backed loan programs, such as FHA and mortgage insurance makes low down payments possible. The hassles of finding the money for property taxes twice a year are less of a concern when you finance. Lenders will impound the taxes as part of your monthly payments, making it a non-issue.
It is true that, as a homeowner, you have to worry about insurance and repairs but for many people, dealing with such things in return for the right to control how they fix up their home is a bargain.
Freedom Versus Equity Building
Renting gives you flexibility and the freedom to move, without responsibility. Buying gives you control over your domain and stability that is very desirable at a settled stage of life. If you work out the numbers it tends to favor ownership because of government-backed loans such as FHA and low down payments, as well as the equity stake you will build over time.
If you want the freedom to pick up and leave anytime that is great, but you might have pay a financial premium for it. Otherwise, if you are more settled and looking to build some equity, buying your home might be an option that is priceless.
Why on earth would you be willing to pay for the privilege of paying off your home loan? That is essentially what you will be agreeing to, if your finance company attempts to include a prepayment penalty in the terms of your loan. The simple advice is don’t walk away, run!
Good For Lenders Bad For Borrowers
Banks and other finance companies are in the business of making money. And thank goodness they are too! Because they provide an excellent service that has enabled consumers to reach high levels of prosperity, of which previous generations could not have dreamed.
Lenders like to be able to count on a monthly income and it annoys them when a borrower pays off a loan. That means the lender has to find another borrower to lend their funds to. From the time that you pay off your loan until the time they receive the first payment from the next borrower, they’re losing interest.
Prepayment Penalty Basics: The Short Answer Is No
Fortunately the lending market is big enough and competitive enough to keep this sort of thing in check. So, prepayment penalties are mainly for borrowers with poor credit histories and limited options, also known as the sub-prime lending market.
For the rest of us, penalties can be easily avoided by shopping around. One of your most important demands of a lender must be that they do not include any prepayment penalties.
The Long Answer Is Also No
When you are in the market for a home loan and you are choosing a lender, make sure that you establish that there are no clauses in their contract that amount to a prepayment penalty. If you have poor credit you may not be able to avoid penalties and they usually contain certain limits, such as the first five years.
A penalty may be triggered for even a partial repayment of principle within the penalty period. The particular terms of prepayment penalty clauses will vary according to the policies of each lender, again, shop around.
Since lenders are attempting to put cash into assets and earn some interest, the loss of interest is what prepayment penalties are meant to recover. That means they are generally expressed in terms of that lost income, say, six months of interest on 85% of your loan balance. That can be a pretty big chunk of change! Add on broker’s fees and transfer taxes and all the other costs of selling a home and you’re easily losing money, even in a rising market.
Avoid prepayment penalties if at all possible because they will do exactly what they are supposed to do: Tie you into a home loan with unfavorable terms. Most homebuyers should be able to avoid them with ease. It just requires that you pay close attention when you are reviewing the terms of the loans on offer and decline any that require you to pay for the privilege of paying off your home loan.
The Credit Data Big Three
Credit card basics form one of the key features of modern life. When you think about it, it’s pretty amazing that a person can borrow enough to buy a house, based entirely on electronic records. However, the most important thing to know about credit report basics is that lenders will want to understand who you are, as a financial entity. So, it is vitally important that you know too.
The records of almost anything that you have ever officially borrowed are stored in the databases of three very powerful multinational companies: Equifax, Experian and Trans Union. These three companies have made your financial existence their business. Any time a company has agreed to lending you money it is safe to assume that they reported it to at least one of these three agencies.
Financial companies sell your financial information to these services and buy it back, to judge your financial trustworthiness, in deciding whether or not to extend credit to you. This is related to your credit score but it goes into much more detail. Every time you apply for a loan, get credit and whether or not you make your payments is tracked by each of the credit agencies.
Credit Report Basics (As They Relate To Mortgages)
When you decide to purchase a home or refinance your current home, you are going to need approval from your lender before they agree to underwrite your loan. This requires that they get to know who you are. They want to make an accurate estimate of the risk that they will be taking by extending credit to you.
Your lender will request a copy of your records from each of the three agencies. The reports that they will receive will add up to something the size of a telephone directory when printed out, if you have had credit for an adequate length of time to qualify.
Your lender will be looking for records of what you have borrowed in the past, how punctual you were in making your payments and what your financial condition looks like at the time of application. They are trying to establish your behavior and your present net worth, as well as your net worth once they extend credit. Finally they will want to be assured that the monthly payment obligations will fit your budget. All of this information will be available from the records that they source from the three agencies.
Prepare To Be Judged
The laws that govern credit and lending as well as credit reporting state consumers must be able to review their credit files once a year, at no charge. The Federal government has a website that is the only place that is authorized to do this on the World Wide Web. By going to the approved site at www.annualcreditreport.com and requesting your reports.
Not all companies report to all three so you can expect there will be some minor variations on what is posted to your credit report. That is why lenders will be looking at all three reports, they want to make certain that they do not miss any important details. It is prudent to check your credit reports with all three agencies every year, as you are allowed by law. Another good reason is that, because there is the potential for variation in your three credit reports,there is also the potential for some error to crop up in one of them.
One word of caution when you are searching for your free credit report: The only site authorized for this purpose is www.annualcreditreport.com. There are credit-monitoring services and the reporting agencies themselves will offer to give you onetime access with strings attached. Be warned that they will attempt to tie you into a contract for expensive monthly services. While credit monitoring may or may not be something in which you are interested, that is not the objective here. You want to simply establish the credit report basics before you approach any lenders.
Requesting a copy of your three credit reports should be the first step when you are preparing to apply for a home loan. It will help you understand what lenders know about you and you can deal with any obstacles before they derail your application. It’s a matter of credit report basics.
The HARP Refinancing Lifeline In An Ocean Of Debt
The last few years have seen some turbulent times in the home lending market. One of the ways that the Federal government has been helping homeowners to recover is through the Home Affordable Refinancing Program or HARP. The conditions of the market in the mid-2000s were so buoyant that even the most levelheaded buyers became swept away in the currents of the bubble.
The HARP program is intended to help homeowners by giving them more affordable monthly payments and allowing some financial room to breathe. There are some conditions that apply and it will only be worth the effort if the lower payments balance against the cost of refinancing into a HARP mortgage.
When real estate markets are stable or rising, adjustable rate mortgages (ARMs) are a low-cost option for the home. The problem is that many were sold to homeowners with extremely low “teaser rates”. The selling point was that they could re-finance away the risk, when prices went up further. Instead, the bottom fell out of the market and it caused many personal financial disasters.
The Bottom Line For HARP
HARP is specifically designed to help with mortgage payments; there are no options to withdraw cash from the equity of your home. The program is available to struggling homeowners with Fannie Mae or Freddie Mac backed home loans that were funded before May 31, 2009. Your loan to value ratio must be higher than 80 percent.
It may not be immediately obvious whether your mortgage is actually held by one of these two agencies. Your loan may be serviced by other entities, such as Bank of America and still Fannie Mae or Freddie Mac might be holding it.
The HARP basics are pretty straightforward. The program allows struggling homeowners to refinance on favorable terms that include reduced interest rates. That in turn reduces the payments. If you currently have an adjustable rate mortgage that qualifies, you can use HARP to lock-in a fixed rate.
There are also options with shorter terms that might enable you to build equity more rapidly. Closing costs, which are added to the balance, are lower because in most cases you will not be required to get an appraisal or get loan qualification. Recent improvements to the program have reduced the paperwork, which has cut down the processing times.
This Too Shall Pass With Time And Assistance
The inflated appraisals of the last decade tempted far too many buyers into taking on more than they could ultimately handle or into withdrawing equity that vanished with the market collapse. HARP has been one of the solutions that homeowners trapped in negative equity and high payments can turn to for help. It may not be right for your particular circumstances but if you find your mortgage note is held by one of the two eligible agencies then it could potentially be a lifeline to personal recovery.