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Finding The Lowest Mortgage Rates

Mortgage tips.

Dear Visitor,

At Berkshire we know how important getting the right mortgage loan can be.
Understanding how mortgage loans work is an important step in that direction.
Before getting your home finance loan please give me a call. I will help you get
the lowest rates available. I hope you will find the following Mortgage Tips helpful.

Best regards,
Mike Salkin

APPLY FOR A MORTGAGE or PREQUALIFY
It's free and without obligation.

 A QUICK OVERVIEW OF MORTGAGE LOANS

The mortgage loan company acts as a middleman between the consumer, you, and the source of funds, the investor. Investors are often banks, insurance companies or a group of individuals that want to invest in mortgages. If you have invested in a bond fund that holds GNMA's you have been a mortgage investor! Mortgages are often grouped together and sold as a package. Most of the time the only way you know it has been sold is when you get a notice telling you to send the payment to a new address. The loan could still have changed hands without your knowledge if the new owner retains the same administrator to handle the payments. You have a lot of flexibility in structuring a loan to meet your needs and most mortgages can be paid off anytime without a penalty.

CHOOSING THE RIGHT MORTGAGE COMPANY

1. Virtually all loans are sold in the secondary market. There is no advantage to you in dealing with a mortgage company that keeps its loans. Often the companies that keep their loans do so because they represent good investments. Translation, your rate is higher than the market rate.

2. Your interest rate is based on the cost of funds and the markup added by the mortgage company to cover expenses and earn a profit. Lenders that use high volume investors and run an efficient operation are better able to offer low rates. This is due to a low cost of funds and a minimal markup for overhead, translating into a great rate for you.

3. Because of competitive pressures, the maximum rate variation between most mortgage companies will be within half a percentage point of each other. Don't focus only on rates. Choosing the right loan officer can make a far greater impact on your bottom line than focusing exclusively on the rate. Find a loan officer that knows the business and is willing to work with you to maximize your savings. Remember, you're making an investment decision on your home, so it pays to work with someone who will treat it that way.

4. Loan options have decreased in the last few years, mostly in an attempt by mortgage companies to eliminate risky types of loans. Borrowers with good credit and available funds for a down payment will still find plenty of lenders willing to generate loans. Mortgages can be structured to meet your individual needs. Make sure you discuss with your loan officer your preferences, wants and needs. You'll be surprised at what is available.

5. Normally, Direct Lenders such as Correspondent Lenders are able to offer better rates, lower fees and quicker turn times than most Mortgage Brokers. The reason for that is they originate the loan in their own name and fund the loan with their own assets. Unlike Direct Lenders, Brokers do not have in house underwriters and must rely on the investor to do the underwriting, which is expensive and time consuming. Self funders tend to have access to better pricing from the investors they have correspondent relationships with due to the added responsibility the Correspondent takes on in originating the loan. The easiest way to tell the difference between a Direct Lender and a Mortgage Broker is to find out if they have an in house underwriter. That said, most direct lenders also have the ability to broker loans to investors that they do not have a correspondent relationship with. Sometimes a brokered loan makes sense, depending on the needs of the borrower.

SHOPPING FOR RATES

1. When you shop rates always shop on the same day. Rates change daily and sometimes several times during the day. The best time to shop is after the bond market closes at 2:00 P.M.  The last potential rate change for the day will have taken place by then.

2. Always compare apples to apples. Get your rate quote on the same type of mortgage with the same lock period and same loan amount.

3. Just because a mortgage company has the lowest rate today doesn't mean they will have the lowest rate tomorrow. Sometimes an investor with extra cash to invest will temporarily offer a slight rate reduction to attract more funds from the mortgage company.

4. Be wary of rates that sound too good. They may be teaser rates, just to get you in the door.

5. Understand that mortgage companies make money on the front end, through the origination fee, loan fees, and discount points, and the back end, through the mark up on the interest rate. The interest rate mark up allows them to sell the loan for more than the loan amount to the investor. Make sure you consider the fees along with the rate.

6. Always ask for a break down on lender fees at an interest rate that you could lock today. Most costs are third party costs that are not controlled by the lender, so don't put too much weight on differences between lenders on those categories of costs as they are estimates. At closing they are charged at actual cost. The important costs are those that are not paid to a third party provider but charged and retained by the lender. They are origination fees, discount points and other fees that are often referred to as "junk" fees.

HOW YOUR INTEREST RATE IS DETERMINED

The rate you are quoted is based primarily on three things. The first is the interest rate investors are willing to  pay for a mortgage. This is the market rate or the "par" rate. The second is the adjustments that relate to the specific loan. This covers factors like the borrowers credit score, the amount of the loan, the location of the property, whether the loan is a purchase, rate and term refinance or a cash out refinance, or if the property is owner occupied. These factors either increase or decrease the numbers in the grid below. The third determinate is the amount of profit the lender wants to make on the loan.

Below is an example of the pricing grid that lenders use to price loans. The numbers in the grid represent the percentage of the principal amount that the investor will pay for a mortgage loan at the terms input into the pricing engine. All of the adjustments have been input so the only consideration is the lender's profit margin. A number under 100 requires the lender to pay the difference between it and the loan amount while a number over 100 nets the lender a profit.

Rate 15-Day Price 30-Day Price 40-Day Price 50-Day Price 60-Day Price
4.500 97.893 97.759 97.670 97.581 97.491
4.625 98.408 98.269 98.176 98.084 97.991
4.750 99.314 99.169 99.073 98.977 98.881
4.875 100.179 100.030 99.930 99.831 99.731
5.000 100.717 100.563 100.460 100.357 100.254
5.125 101.156 100.996 100.890 100.784 100.677
5.250 102.051 101.886 101.776 101.666 101.556
5.375 102.793 102.623 102.510 102.396 102.283
5.500 103.000 103.000 102.975 102.858 102.742

Most lenders work off of a two to four percent margin. Ideally, you would want to find one closer to the low end than the high end. Assuming a two percent margin and a 40 day period until closing, the rate a lender would quote for a 0 +0 loan (no origination fee and no discount points) would be 5.375%. At that rate the lender is making a 2.51% margin. A rate of 5.25% would require the borrower to pay a discount point of  0.224. OK, what about the 0.51% extra that the lender is receiving for the 5.375% rate? Most of the time the overage is kept by the lender. It could be credited back to the borrower as a "negative" point to offset some of the borrower's closing costs. Ask a potential lender what their minimum profit margin is on the back end and if they credit back the premium. If the loan is brokered, any overage must be credited back to the borrower.

Buying down the rate to 4.75% in the example above would cost roughly 3.00%, one percent to cover the deficit from par and two percent to cover the lender's margin. It will take almost six and a half years before the savings from the lower payment covers the three points paid to get the lower rate. Before paying points make sure the recovery rate makes sense.

STRUCTURING YOUR MORTGAGE

1. Avoid buying down a rate. Try to get a zero plus zero rate (no points or origination fee). Points are pre-paid interest that lets you buy down the interest rate. The origination fee represents the mortgage company's fee for making the loan and acts just like a point. One point is equal to 1% of the loan and will typically buy you a 1/4% lower interest rate.

2. The more you pay up front for a loan, the less likely you will be able to justify refinancing when rates drop.

3. The average home owner rarely keeps their mortgage long enough to benefit from buying the rate down. On the average loan it takes six years before you save enough on the lower rate to make up for the higher up front cost. Remember, a dollar today is worth more than a dollar tomorrow, keep your money in your pocket.

4. Usually taking advantage of no-cost loan options is beneficial. The rate will typically be from 1/8% higher on real large loans to 3/8% higher on small loans. It takes about six years before the difference in the monthly payment, due to the higher rate, exceeds the amount of the up front loan costs. All the closing costs and origination fees associated with the loan are waived. You will still have to cover prepaid expenses, such as the tax and insurance escrow and interest charges. These are not loan fees, but costs all home owners have to pay. By using no cost loans refinancing is easier since you aren't faced with the decision of whether the lower rate will offset the loan expenses. The loan can be refinanced as often as you feel is justified by the lower payment.

5. The typical mortgage is based on a 30-year amortization schedule. The term of the loan can be shortened if desired to 20 years or 15 years. The principal and interest payments, at current rates, on a 15-year mortgage are about 33% higher than on a 30-year mortgage. The interest rates on 15 year mortgages are normally lower than they are for 30 year mortgages. You will save substantially on total interest paid, but opting for the shorter term and higher payment to save interest may be a mistake. You can always add extra principal payments to your regular mortgage payment. The longer term and smaller payment may make more sense if your income isn't steady and the higher payment may occasionally be a financial burden. The greater the interest rate differential between the two, the more attractive the 15 year becomes. Another advantage of a 30 year mortgage is that you will have greater buying power as you can qualify for a more expensive home.

6. When purchasing a home it's not necessarily the best idea to get the smallest mortgage amount possible. Make sure you do not deplete your savings which may cause a cash shortage in an emergency or drain your investment accounts and adversely affect your long term financial goals. A mortgage loan is a financial tool, so use it as part of your overall financial plan.

7. The decision of paying private mortgage insurance, which is applicable on loans in excess of 80% loan to value should be based on whether you need the higher loan amount or if it makes financial sense in your particular case. Usually the lender will allow you to quit paying the insurance premium after the loan to value ratio drops to 80% and must drop it after the loan to value reaches 78%, based on the original purchase price/appraisal. The 80% loan to value threshold can be reached if the loan balance gets paid down or if the home's market value rises, or both. You can also use a second mortgage to avoid the mortgage insurance. The rate will be higher for the second, but the combined payment may be less than with a first mortgage alone.

REFINANCING

1. Don't be "married" to your mortgage. Refinance, at no cost, when rates drop enough to make it worth the time. When evaluating the savings don't look at how much you will save each month, look at the annual savings. Twenty dollars a month doesn't sound like much, but who wouldn't want to save $240 a year?

2. There are no limits to the frequency you can refinance other than most lenders will be hesitant to refinance a loan that is less than 120 days old due to penalties from the investor.

THE FINANCIAL ASPECTS OF A MORTGAGE LOAN

1. Mortgage rates follow the bond market. A loan officer who is well versed in the bond market is essential in helping you get the best rate lock. Closely monitoring the bond markets as well as staying informed of relevant economic conditions that affect interest rates and housing values is critical.

2. Most mortgage companies offer a lock and float down option. This option allows you to lock a rate and if rates decline, lock a second time at a lower rate. Usually, these programs are too expensive. The investor typically reaps a higher return on these loans. Your loan officer should be able to help you decide if the benefits outweigh the expense. Of course, if rates fall you can always do a no cost refinance.

3. Your mortgage loan can be a valuable financial planning tool. Your investment portfolio can get a large boost by getting the maximum refinance loan on your house and investing your equity in high return assets such as stocks and equity mutual funds. The only caveat is that you must be able to afford the higher payment. Investing a large lump sum is far superior to investing smaller amounts periodically. This strategy lets you maximize the return on your assets. The interest from your mortgage loan is tax deductible and if you invest wisely, the return from your investments can be tax deferred. Your loan officer should be well versed in financial assets to help you make the right decision.

4. Avoid using your home equity for bill paying purposes. Many mortgage companies are pushing bill consolidation loans using your home equity. Granted, the rates are going to be lower and they are tax deductible. Use this strategy with care. If you default on credit card debt, they don't take your home. If you default on your mortgage, they do.

MORTGAGE TOOLS


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