by Harold J. Copher
Today’s mortgage applicant is much better informed than when I originated my first loan in 1998. No doubt about that. Interest rates remain the focal point of discussions today, just as they did yesterday. Everyone wants the lowest rate, but the two most misunderstood aspects of interest rate shopping remain the same: The rate/cost paradigm and market volatility.
First, consider these two points regarding interest rates that should hold true from lender to lender. The longer the period of time you are asking for a fixed interest rate mortgage; the higher the rate will be. For the same client, a 15 or 20 year fixed-rate term is likely at a lower interest rate than a comparable 30-year, fixed-rate term. Next, the dollars invested in the transaction cost works inversely with respect to the interest rate. The more dollars invested in lender fees, the lower the rate should be and vice versa.
The concept of “no cost loans” is a marketing and sales effort. There are third party and internal operational costs associated with providing your client with a mortgage loan. Nobody works for free, right? However, there may be flexibility as to who pays those costs. The lender may be willing to absorb those costs if the client is willing to accept a slightly higher interest rate. In addition, there are usually options to prepay interest in advance in the form of a discount to improve the interest rate received.
Unlike most consumer loans, mortgage interest rates can change day-to-day and sometimes within the same day. That is because these interest rates are market based —influenced by investor demand for mortgage backed securities. It is a marketplace driven by those in need of funds to acquire real estate interfacing with investors willing to accept an income stream based on economic conditions and the risk associated with investment in the housing market.
When referring to economic conditions, I think it is wise to realize that the term encompasses both expectation and reality. Start by thinking of the concept in terms most are familiar with — stock prices or securities for a public company registered and traded on one of the exchanges. For example, if there is an announcement in the mainstream media that the U.S.-China trade discussions appear to have stalled, then the market value of stock in firms impacted by those failed negotiations will change. However, if the negotiations were actually ongoing and a new agreement was finalized, then the market value of those securities impacted by the new agreement would react again based on the reality of that occurrence. The market value was impacted by the perceived failure, and then again by the reality of the terms of the new agreement.
There are certainly many factors impacting investor demand for mortgage backed securities on a day-to-day basis. Some expected and some not expected. There will be times when our home buyer gets caught in a timeline where the market value of mortgage backed securities and the rate quoted is impacted by an expectation, a reality or both.
Several years ago, I remember a monthly inflationary index reported at much higher than expected. Interest rates increased that day based on the newly reported index. The next month, the agency issued the new numbers and revised the previous month’s report downward, citing an error in the original computation. That error came at a bad time for clients locking the interest rate for their new 30-year, fixed-rate mortgage. I don’t remember the impact of the erroneous report causing anyone to re-think their home buying plan, but they did receive a slightly higher interest rate or an increase in their transaction cost to retain the original rate, sadly due to a market reaction driven by what proved to be false information.
There have been several recent articles noting how some analysts are fearful that recent trends in the stock and bond markets could be signaling an economic downturn. These forecasts may or may not prove to be true, but the expectation of a downturn or evidence to the contrary could impact our mortgage rates in the short-term. RL