Palos Verdes Source

Yesterday, the Fed lowered interest rates one-half a percent.   The Fed Fund Rate now stands at 1.5% and the Discount Rate is 1.75%.  What do you think happened with home mortgage rates?  No, they did not go down but went up instead one-half a percent.   A 30-year fixed loan at zero points for Palos Verdes real estate (and elsewhere) is 6 .375% conforming, 6.5% jumbo conforming and 7.5% for jumbo loans.

“Why the increase?” you might ask.  The word on the street is that this 1/2% increase in mortgage rates may be an aberration but is probably because the Federal Government has to sell tens of billions of dollars of Treasury Bills this week to cover debt.  The Government had to sell them at a discount which makes the yield higher.  Some of the rate increase may also be profit taking by the lenders.

Of course, 6.5% interest fixed for 30 years is still a good rate.  Only in the last five out of 35 years has the rate been lower.  And today’s 6.5% rate is with zero loan points!

30-year fixed interest rates are down today compared to the beginning of the month.    Jumbo loans actually went down 1/2% today (30-year fixed).   The remainder of the loan products quoted above are up one-eighth of a percent since the beginning of the month.

There are many changes in the wind for mortgages.  The word is that by December jumbo conforming loans will be gone.  No income verification loans are forecasted to be obsolete any day making it harder for self-employed borrowers to get loans.  There will also be less choices in loan programs as the current financial chaos settles.  For example, negative amortization loans and interest only loans are currently illegal in some states.

It is more important now than ever to get the counsel of a knowledgable, well-connected loan officer who can get you the loan.

Above loan information is provided by Jim Kurata, Peninsula Mortgage/Chase.

Lenders have been cautioning us for months to make sure our clients pull out cash from their home-equity line of credit if they are going to use it to purchase a home (without selling their existing home and avoid a bridge loan).  Many buyers are also using their home-equity line of credit to purchase second homes or income property.   The caution has been to have buyers immediately get that cash and put it in a separate account before they actually need it because many buyers have written checks to escrow to complete a purchase and found that their bank had closed or reduced their credit line.

Lew Sichelman in yesterday’s LA Times states that “Lenders need a valid reason to reduce, suspend or terminate such borrowing.”   His article goes on to explain that under Regulation Z there are 3 reasons a bank can pull your line of credit: (1) misrepresentation when applying for the loan (2) not making loan payments or (3) “when actions adversely affect the property pledged as collateral or the creditor’s security interest in the property”.

The Federal Reserve Board has interpreted Regulation Z’s definition of Item (3) above to mean that equity in said property has been reduced by 50% since opening the line of credit.  Sichelman states, “The 50% rule is not as wide as it seems, however.  Values don’t have to plunge 50% for your equity line to be shut down.  Rather, it’s only the amount of unencumbered equity that needs to fall by half.” Let’s assume your house was appraised at $100,000, with a first mortgage of $50,000 and the bank gave you a $30,000 equity line.  According to the Federal Reserve Board, the difference between your credit limit and available equity is $20,000 (50% of that is $10,000) and if your house decreases in value from $100,000 to $90,000, the bank can close your home-equity line.  Ouch!

If you have a home-equity line of credit,  the entire article linked above is worth a read. 

Mortgage rates have changed again this week.  The market seems to  swing according to the media focus.  With the start of the Olympics, we may be in for a bit of a reprieve.  However, according to a CNN article by Les Christie, borrowers may benefit by locking in their interest rate (pre closing).  Several experts cited in the article expect interest rates to go up in the next six weeks and forecast at least 7% interest rates by the end of the year. 

“For every half point interest rate increase, the monthly payment on a typical mortgage of $200,000 jumps nearly $70.  That adds up to ore than $800 a year, and $8,000 in the first 10 years of a 30-year mortgage”  For Palos Verdes real estate, the numbers are much higher but one can use this information as a base to compute what it will mean to their new mortgage.  Locking in an interest rate today (if you are in contract or have a binder on a home) is good for 60 days and may cost as much as an extra 1/8 of a point.  It’s worth a call to your lender to inquire.

Above mortgage rates are provided by Jim Kurata, Peninsula Mortgage/Chase.

Friday’s mortgage rates are up between 1/4 percent (jumbo 5/1 Year ARM) and 3/4 percent (jumbo 30 year fixed) compared to my last Mortgage Update on June 8, 2008.  As you can see from the chart above, today’s borrower of a 30 year fixed loan will pay 6.5% conforming and 7.75% jumbo.  Attention buyers:  The time is right to get off the fence and purchase your new home now.  Rates are not forcasted to return to last year’s record lows and may even be going in the opposite direction.  There are FHA loans available with as little as 3% down on loan amounts up to $729,750 (this higher loan amount is only approved through the end of this year unless Congress extends it).

Above mortgage rates for Palos Verdes homes are provided by Jim Kurata, Peninsula Mortgage/Chase.

“How is my credit score determined?” ask buyers of Palos Verdes real estate.  The chart above details the scoring system used by Fair Isaac, the creator of the FICO score, one of the most widey used credit scoring methods employed by most banks and lenders in the United States.

What surprised me is that Payment History (35%) is twice as important as Length of Credit History (15%) .  Making even a small payment on time is important to your overall credit score.  Amounts Owed (30%) is a little more complex as it includes the total balances on each one of your lines of credit in proportion to the amount of total credit available.  For example, if you have only two lines of credit open, each with a $5,000 credit limit, and both lines of credit have a $4,000 balance, you will be left with only 20% of your total credit available.  This can seriously drag down your credit because you are viewed as possibly overextended, and you have little credit left over to leverage your high debts. 

For this reason, closing credit cards or other credit lines will lower your total available credit, and will likely drop your FICO score.   It may be wise to periodically raise the credit lines on your credit cards as a means to increase your total available credit, without having to open new credit cards unnecessarily.  Having too many lines of credit open can have a negative impact on your credit score. 

Speaking with a  good lender or morgage broker before making your real estate purchase is the best way to learn how you can improve your credit score.

Above chart courtesy of Progressive Title

Where exactly is the real estate market going?  Owners of Palos Verdes real estate as well homeowners across the country would love to know the answer.  In addition to the “in your face” reporting about real estate (which can be pro or con depending on the reporter and which forecast he is looking at) there are other subtle indicators.

Recently Newsweek had an article buried on page 61 entitled “Finance - Cash, on The House” talking about a new take on reverse mortgages.   There are several lenders now offering a new loan product where the lender will share future changes in value 50-50 with the borrower.  The borrower must not sell the house for at least five years.  The example given was a $71,000 loan on a $500,000 home.  After five, years when the property is sold if it is worth $600,000, the borrower owes $121,000 (original $71,000 plus $50,000 which is half the appreciation).   If the home only sells for $400,000, the borrower pays the lender $21,000 (original $71,000 minus $50,000 which is half the depreciation).

This is not an altruistic gesture on the part of lenders.  They are betting the market will be up in five years – not flat, but up.  Lenders are looking to make a profit.  Historically, real estate has been an excellent long term investment.