The Veridian Blog

Trading ends early today ahead of the long Memorial Day weekend and mortgage rates continue to turn for the worse as the equity markets strengthen.  The Fed also announced yesterday another $100 billion in Treasury sales, which makes Treasury securities less appealing to investors.  It caused a slight uptick in rates and the bias has now shifted upward.

We are still confident rates on qualified standard and high-balance conforming loans will remain under 5% in the near future.  All wholesale lenders have smoothed out turn times and are better able to deal with large volume than at any other time this year.

We wish you all a safe and happy Memorial day weekend!                                                    

A rate-lock is a lender’s commitment to an applicant to loan money under specified terms, including interest rate, term, amortization period, payment, origination fees (points), and discount (or rebate) points.  The longer the lender has to commit, or guarantee these terms, the less favorable the terms will be for the applicant.  In simpler terms, the interest rate and/or points will be higher for longer rate-lock periods.  Therefore, the best terms available will be reserved for the shortest lock-in period.  The risk associated with the short rate-lock period is that the applicant must be sure they can close the loan transaction within the given time frame and also hope that interest rates do not move before they reach that stage of the process.

For example, two typical rate-lock periods are the 15-day and 30-day locks.  Traditionally, an applicant could lock a rate, say 6.0%, for 30-days, submit his application to underwriting, have it be approved, clear conditions, sign papers, and fund the loan within 30 days.  Alternatively, the applicant can also choose to submit the application without locking (called a “float” loan), have it underwritten and approved, clear all conditions, and then lock the 15-day rate.  The risk is, the rate may fluctuate higher from Day 1 to Day 15 and the borrower, particularly in a purchase transaction, may prefer not to be put in that position.  But for those risk-neutral borrowers, they can be rewarded by the lower rates offered by the shorter 15-day lock. 

In a declining interest rate environment, as we have seen thus far in 2009, the prevailing strategy is to wait as late as possible for the shortest rate-lock period that offers the best mortgage rates.   This has become the preferred choice as the spread between 30-day and 15-day rates has widened further since the beginning of the year.

The mortgage landscape added a few twists during the last month to allow more homeowners opportunities to refinance their mortgages and lower their monthly payments.

In addition to already historic low 30-year fixed mortgages, these are the three major changes that have taken place most recently:

1. The new high-balance conforming limit hit $729,750 a few weeks ago thereby allowing homeowners with balances between the previous limit of $625,500 and $729,750 to qualify for the high-balance programs.  Previously, homeowners with loans within this range could only apply for Jumbo programs with dismal interest rates.

2. The Make Home Affordable Act has granted relief to homeowners who have made payments on time yet have been precluded from refinancing due to a decline in home values increasing their loan-to-value ratios above 80%.  Those fortunate enough to qualify (see previous post) can now enjoy the same sub-5.0% rates as homeowners who are still at 80% LTV or below.

3. Interest-only loans have suddenly returned for 3/1 and 5/1 ARM programs for standard conforming loans of $417,000 or less.  These programs became much of the focus and blame during the initial housing bust but remains a legitimate financing tool if the terms are properly explained and understood.  They are invaluable for homeowners with inconsistent income and help others qualify for higher mortgages because the minimum required payment is lower without any principal allocation.

For more information, please email us!

info@veridianmortgage.com