Dennis' Mortgage Blog

Question of the week:  What is the primary determination of my mortgage rate?

Answer:  There is not one primary determining factor for the interest rate on a mortgage.  Each week I quote a standard rate that has three major components that determine the rate: 1) It is a purchase 2) the loan to value is 80% 3) the borrowers FICO score is 740 or greater.  For conforming mortgages these are the primary factors: purchase or refinance (and then if there is cash out or a 2^nd or equity line being paid off), loan to value and credit score.

The biggest adjust we have seen in pricing for mortgages has been the tiered scoring for FICO scores.  In our prior loosy-goosy market most lenders had the same price for all scores over 680.  Now Fannie Mae and Freddie Mac are tiering pricing based on credit scores and many lenders are adding additional price costs or incentives.  As your score gets into higher tiers you can expect better pricing from 680 to 720, from 720 to 740, from 740 to 780 and some have even better pricing if the middle credit score is over 800.

The “best” pricing is on low loan to value purchase transactions with very high FICO scores—this group of borrowers also represents the smallest group of transactions. 

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We continue to see stability in the mortgage market, primarily because the Fed is still buying mortgage backed securities (bonds from Fannie Mae and Freddie Mac).  For those interested in the technical aspects, the Fed is buying coupons in the 4% to 5.5% range keeping our current floor on conforming in the 4.75% range; if they decide to buy coupons below 4% we will see rates soften and drop—I don’t think they will be in the market for the coupons below 3% so other factors will impact mortgages.

The economy is continuing to provide some bright spots.  One such spot of brightness believe it or not comes from the auto sector as Ford, who did not take any government money like GM and Chrysler, is showing a smaller loss than anticipated and is predicting profitability in 2011 if its plan continues to hold.  What do you know, they restructured internally, forced themselves and their vendors to renegotiate contracts, and did not take on Congress and the White House as partners to tell them what kind of cars they have to make and they are getting their footing back.  Hmmm, ‘magine that.

Looking ahead the Treasure is going to flood the market next week, generally not good news for interest rates. I’m going to use that “I” word again; the Treasury continues to act in a manner that increases the chances for strong inflation once the economy bottoms out.  Their action next week will add to the dynamics already in place for a run up in prices in the not too distant future.  Anticipation of inflation for bond investors is the same as actual inflation.  For those waiting for a “better” or lower rate, next week could set you back several weeks or month or more.

Rates were flat for the week with the exception of Conforming Jumbo rates which declined on a round of Fed purchases.   Still no movement on government loans as the Fed concentrates on Fannie and Freddie.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  4.75%                 FLAT

30 year conforming-jumbo 5.00%                     Down 0.25%

30 year FHA    5.00%                                      FLAT

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Looks like our summer weather locally has broken back into Spring—thank goodness I do much better in 60-65 degrees than 95-100! (Which is why we are headed to Scottsdale at the end of June).  I found out at Open House last night on the first grade calendar that there is only 34 more days of school for Long Beach Unified, spring weather, summer approaching—time to buy a house! 

Have a great weekend,

Dennis

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