Understanding Mortgage Rates – a brief tutorial

To the layman’s eye, mortgage rates seem to move up and down without explanation. But, just like the ocean tides that wash up and back by the pull of the moon’s gravity, mortgage rates have their own driving force, even if they have a less cosmic source.

The mortgage lender that funds your loan is called the originator. A loan originator may be a bank, a credit union, or other type of financial institution. On the date of funding, the money flows out of the originator’s hands and into yours. You then turn that money over to the seller of the home.

Once the loan is funded, the originator has the option of keeping that loan in its portfolio or selling it on the secondary market. If the originator keeps the loan, it makes money by way of the interest you pay each month. If the loan is sold, the originator replenishes its funds, and can make more loans to other homebuyers. Basically, the secondary market investors keep funds circulating so that loan originators don’t run out of money for new mortgages.

Today’s secondary market investors include government-chartered companies like Fannie Mae and Freddie Mac, plus insurance companies, pension funds, and securities dealers. Although Fannie Mae and Freddie Mac are different organizations, they participate in similar activities. Both can buy mortgages, and both can group mortgages together for resale in what’s called mortgage-backed securities (MBS). These are highly liquid investments, meaning that they can be readily bought and sold.

How does the secondary market affect you as a would-be homebuyer?

Investors want to earn the best return possible. The level of return is determined by the current and anticipated condition of the economy. When the economy is on an upswing, future yields are expected to be better than current yields. Investors, therefore, will hold off buying until higher yields materialize. This drives mortgage interest rates up, because lenders cannot sell their loans at lower yields.

Conversely, when the economy is in a downturn, investors buy up what’s available to avoid being stuck with lower yields later. This drives mortgage rates down, as investors are clamoring to buy before yields get too low.

Keeping your eye on mortgage rates

There are many factors that influence mortgage rates, including unemployment and inflation levels, trends in the stock and bond markets, and the federal funds rate. None of these alone will give you surefire insight into the future of rates, but by keeping your eye on all of them, you can have some sense where they are headed.

As mentioned earlier, the secondary mortgage market provides liquidity for the mortgage industry, by allowing investors to buy the aforementioned mortgage-backed securities, which pay a competitive yield relative to the risk involved. Treasury bonds are backed by the U.S. government and used as a benchmark, and are considered the safest debt securities available. The yields on mortgage-backed securities, therefore, need to be higher than intermediate-term Treasury bonds in order to make them desirable to investors, who are assuming a higher risk. Therefore, changes in Treasury bond yields can foreshadow changes in mortgage rates before they actually occur.

Another metric to keep your eye on is the federal funds rate, which is the rate that banks charge when they make an overnight sale to other banks of the money that they keep deposited at the Federal Reserve. The fed funds rate is set during meetings of the Federal Open Market Committee (FOMC), which regulates the buying and selling of U.S. Treasuries and federal agency securities. The FOMC holds eight meetings each year, where they review economic and financial conditions, and decide the best course of action to take to set monetary policy and keep the economy stable. A decrease in the rate will stimulate growth, and an increase will slow growth. Therefore, in periods of high inflation, the FOMC may raise interest rates, and in a period where they need to stimulate the economy, they will lower them. At each meeting, they will either lower, raise, or maintain the fed funds rate. Their decision will impact mortgage rates.

The fed funds rate is intermeshed with the stock market, because stock market trends influence – and are influenced by – the fed funds rate. If the market is struggling and in a downward trend, the FOMC may opt to reduce the fed funds rate and free up the supply of money. Conversely, if the market is on a tear, the Fed may increase the rate in order to keep the economy from overheating.

Today’s Rates: Fixed Mortgage Rates Continue Downward Slide

Freddie Mac released the results of its Primary Mortgage Market Survey® (PMMS®) on June 2^nd, 2011, which showed fixed-rate mortgages declining for the seventh consecutive week to new lows amid continuing weak economic and housing data. The 30-year fixed averaged 4.55 percent and the 15-year averaged 3.74 percent.

Right now is a GREAT time to buy with low mortgage rates and affordable home prices!!

Colorado Housing Market Gradually Warming Up Along With Spring Weather

Each year, springtime ushers in warmer weather, flowers in bloom, the crack of a baseball bat (go Rockies!) and renewed energy for the housing market. After the winter hibernation, anxious homebuyers come out in force trying to find that special place to call home, and sellers finish up last minute touchups and put their homes on the market.

This year is no exception. The Colorado market seems to be gradually heating up along with the temperatures. Most of our local offices are reporting steady to improving sales activity and overall market conditions.

Don’t get me wrong. While many parts of the Colorado are seeing progress on the housing front, the picture isn’t uniform across the board. Some cities are experiencing stronger markets than others. In some communities, certain price ranges are hot while others are tepid. And even within a local market, while one property may get eight or 10 offers, another sits idle waiting for a single buyer.

Nonetheless, the recent uptick in activity in general is providing encouragement to Realtors as well as home sellers.

A variety of indicators—including investor and cash purchase levels and adjustable-rate loan use—are pointing toward a more normal market.  And while the housing market has certainly moved well back from its challenges two years ago, we still have a ways to go.

Distressed properties are still an issue in some counties and drag on prices.  Mortgage financing is still problematic for some borrowers as well.

What this tells us is, we appear to be moving in the right direction. I’m encouraged that the spring rejuvenation in many of our markets will continue in the months ahead, especially if the economy and the local job market continue to improve.

Home Sweet Homeowner Tax Benefits

So you’ve taken the plunge and bought a new home, capitalizing on today’s low interest rates and attractive home prices. Your new house or condo will undoubtedly bring you and your family much happiness in the years ahead – especially when it comes time to pay your taxes.

As the April 15 federal and state tax deadline rapidly approaches, homeowners shouldn’t forget the many tax benefits that are available to them. The good news is that you can deduct many home-related expenses, and the savings on your taxes can easily add up to thousands or even tens of thousands of dollars.

Filing your tax return may become a little more complicated. Instead of filling out the simple IRS form 1040EZ you’ll need to file the 1040 long form and Schedule A, on which you will list all your deductible homeownership expenses. But the extra time will pay off in valuable savings.

Because the tax rules for homeowners are more complicated, we recommend you consult with a tax professional before deciding what you can and cannot deduct. But in general, you can figure on a number of significant tax breaks associated with homeownership, including:

•Mortgage interest. The biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. In most cases, the interest homeowners pay is deductible. This may mean a reduced tax bill overall and a bigger refund.

•Property taxes. As a homeowner, you are entitled to deduct payments of real estate tax on your property if you claimed itemized deductions on your tax return. The IRS allows you to deduct real estate taxes on your primary residence and any other homes you own. There are no limits on the dollar amount of real estate taxes you can deduct.

•Loan deductions. When homeowners borrow against the equity of their home to finance other investments, the interest they pay on the new loan is also tax deductible, within IRS guidelines. Generally, equity debts of $100,000 or less are fully deductible.

 •Vacation homes. Tax breaks aren’t just limited to your primary residence. If you’re fortunate enough to have a vacation home, the mortgage interest on that property is fully deductible too, within IRS guidelines. You can even rent out your second property for a short period of time and still take advantage of the deduction. But be careful – renting it out too much could turn it into a rental property with different tax rules.

•Homeowner exemptions. Depending on where you live, certain real estate property tax exemptions apply. Homeowners should check with local tax consultants to see if they, or their home, are eligible for any additional exemptions.

•Improvements on your residence: While you generally cannot deduct improvements to your home on your taxes, such items can lower your tax bite down the road. Improvements such as a family room addition, a kitchen makeover, or a pool increase the “basis” of your home – i.e., the purchase price plus improvements. When you go to sell, the higher your basis is, the less you will have to pay in capital gains taxes if you pay at all.

•Tax-free profits. The government allows homeowners to keep tax-free profits from the sale of a home that has been their primary residence for at least two years. Single taxpayers don’t owe taxes on the first $250,000 of profit from the sale of a principal residence, while married homeowners get $500,000 when filing jointly.

These tax savings can add up quickly. On a $500,000, 30-year mortgage loan at 5 percent, for example, a homeowner would end up paying nearly $25,000 in the first year in interest alone. At a 33 percent federal and state income tax rate, the mortgage interest deduction alone would save more than $8,200 in that tax year! But again, tax laws are complicated and everyone’s tax situation is different. Consult your tax professional to see how the rules apply to your situation.

SHORT SALE VS FORECLOSURE – what is it and how does it affect your credit?

What does “short sale” mean? “A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for.”
In this time of option-arms coming due we will see more and more borrowers trying to negotiate short sales as opposed to going into foreclosure. In most cases the borrower will be behind on payments and about to go into foreclosure, however this will not always be the case. Some short sales are negotiated simply because a borrower knows they are upside down on their mortgage but has not reached the point where they have late payments. For example, the borrower’s loan is interest only and they have been unable to make principal payments. The original loan amount was $250,000 and they have been making the minimum payment and the loan balance has increased to $263,000. At the same time, the home only appraises for the $250,000 or possibly even less. Because the option-arm period is up, the borrower’s mortgage payments will increase and they are unable to make the higher payment. There is no equity in the property and they cannot sell the home to cover the balance of the loan. At this point they can either try to negotiate a short sale with the lender or go into foreclosure.

If the lender agrees to a short sale, they are buying back the loan for less then what they are owed. This is not something a lender has to do, but it is an option for them. Why would they consider this? The real cost for the lender in a foreclosure action is that they have to carry the loan until they can resell the house. They have to pay the taxes and insurance and this can take time and the cost of carrying the loan can become quite substantial. In some cases it will be more beneficial for them financially to take the short sale.

How does it affect credit? Typically the loan will show up on a credit report as “settled for less then the full balance”. This will have a negative impact on the borrowers score, however it will be less then if it shows as “foreclosure”. How much it will actually affect the score will depend on the rest of the borrowers credit history. It is always best to have an attorney negotiate a short sale with a lender and at the same time have them negotiate how it will appear on the credit report. Some lenders will agree to show the loan as “paid with no late payments” (providing the borrower hasn’t made any) or they may show it as “paid was 30” if there have been some late payments. This would be optimal.

A short sale can also have a negative affect on a borrowers credit if the lender issues a deficiency judgment. A lender may take this route even if they show the actual  mortgage on the credit report as paid as agreed. When they take the short sale there is still a difference between the actual mortgage balance and the amount of the short sale. The lender can then issue what is called a deficiency judgment against the borrower and this will show on a credit report just as any other judgment would. The attorney should attempt to get the lender to accept “payment in full without pursuit of any deficiency judgment.” Sometimes the lender will put the borrower on a payment plan for the deficiency without issuing a judgment. Again, this would be optimal.

The one instance where a lender will not consider a short sale is if the borrower is in bankruptcy. Lenders consider a short sale payoff as a collection activity and collection activities are prohibited once a person has filed bankruptcy.

A year in review and a look ahead to 2011 Housing Market

Tax credit. Historically low mortgage rates. Increased affordability of homes. Those were the factors that defined the housing market in 2010. But all of that leaves us wondering, what is next for real estate. Is the worst behind us? Are we finally on the road to recovery? 2010 was a schizophrenic year, basically two years built into one. The first half we had the tax credit and saw people scurrying to get real estate transactions completed to take advantage of that unique market. The second half was more comparable to a normal market, given the economic conditions that we are faced with today. The tax credit expiration slowed down the market in the past six months in almost all price ranges.

So what’s next as we look ahead to 2011? The consensus estimates from MacroMarkets September survey of 114 economists is that home prices will only rise by 0.8% next year, meaning that prices by the end of 2011 could be little different from where they were at the end of 2009.

Fortunately, we have not seen the dramatic increases or decreases in our market that have occurred in some areas of the country. Therefore we have not had the volatility and stress that many markets have felt. This is now a relatively balanced and flat market with slight variations based upon neighborhood and property demand.

Buyers are still somewhat hesitant to jump in. The move-up buyer isn’t especially anxious to purchase a bigger home, despite some really good prices. And we’ve lost some momentum from entry-level buyers following the end of the tax credit. Both segments of the market are impacted by high unemployment levels. If people aren’t secure in their work and in their futures, they won’t make the big-ticket purchase items like a house.

To really jumpstart the market we will need a combination of three factors: Maintain at least the current level of affordability, see a brighter economic outlook, and create improved access to credit, especially for higher-cost homes.

Appraisals and financing have been the two biggest obstacles facing buyers. Lenders continue to change the criteria used to assess fair market value. Securing financing continues to pose challenges for some buyers. Buyers who have a job, verifiable income, minimal debt and a good credit score, are typically able to secure financing. Conversely, buyers who are self-employed, cannot verify income, have challenging credit or who have large amounts of debt are having a difficult time obtaining financing.

On the plus side, mortgage rates remain near historic lows and some analysts expect them to remain low for the time being. However, most economics agree that rates may be as low as they’ll get and will eventually rise, perhaps toward 5% by the end of 2011, according to the Mortgage Bankers Association. While that bump may not be immediately alarming, it is important to point out that even just a quarter of a percent increase could significantly affect an individual’s purchasing power.

My recommendation to potential buyers is this: Assuming you are secure in your job, this may be the best opportunity to buy a primary residence or even a vacation home. These are unprecedented times when it comes to buyer opportunities. The mortgage rates are probably as low as they will get. In some communities the inventory levels are high, and prices are very attractive. It appears that everything is in alignment.

For homeowners, if you do not need to sell, meaning that you are not interested in taking advantage of the move-up market, you’re not relocating, you’re not in a financial position that requires you to sell, then this may not seem to be the best time to sell. However, there are still opportunities for you to get a fair price for your home.

You need to be realistic when pricing your home, comparing comparable homes in your neighborhood. It is also important to stage your home properly. Clean out the clutter. Make sure the home sparkles. Paint the front door. Make your home look the very best it possibly can because right now there is a lot of competition out there and if your home doesn’t shine, buyers will move on.

The upper-end is probably going to be the first area of the market to recover because that market has softened since the middle of last year. Buyers of upper-end properties appear to be patiently waiting for signs of an economic turnaround, which may mean that we have a build-up of affluent, impatient buyers. Once those buyers feel more confident that the economy is improving nationally as well as in the Denver Metro area, then these buyers will make their move. When that happens, the rest of the real estate industry will be pulled forward, too. If we were asked which market will show the most improvement in 2011, we would have to say the luxury market.

If now is a good time for you to buy, then you may want to purchase the most home you are comfortable with owning. With interest rates at historic lows, affordability high and inventory levels plentiful, it may make sense to get in the market now. What we do know is that this unique combination won’t last forever and it’s important for consumers to be aware of that fact and act before it’s too late.

Best wishes on a healthy and prosperous new year!

Amy Ballain Joins Coldwell Banker Residential Brokerage

WESTMINSTER, Colo. – January 17, 2011 - Amy Ballain, a leading real estate professional, has joined Coldwell Banker Residential Brokerage’s North Metro office in Westminster as a broker associate.  Ballain and her top-producing team are now serving the diverse real estate needs of clients throughout the north metro Denver area. 

Ballain earned her real estate license in 2005 and is a member of the North Metro Denver Realtor Association, the Colorado Association of Realtors, and the National Association of Realtors.  She holds the Graduate Realtor Institute designation recognizing the successful completion of stringent continuing education courses in real estate and has garnered numerous awards for superior sales production. 

Ballain’s professional background includes a position as sales manager for John Laing Homes in its Denver division.  She attended Kaplan Real Estate School and chose Coldwell Banker Residential Brokerage because of the company’s focus on advanced technology, national brand recognition, and superior marketing programs. 

The Coldwell Banker Residential Brokerage office in Westminster is located at 2861 W. 120th Avenue, Suite 200, and can be reached at 303.235.0400.  Ballain may be reached directly at 720.490.6865 or via e-mail at amy@thereddoorgroup.com.

About Coldwell Banker Residential Brokerage

Coldwell Banker Residential Brokerage, a leading residential real estate brokerage company in Colorado, operates 14 offices with 1,115 sales associates serving the communities of the Denver area. The company offers residential and commercial brokerage, corporate relocation and mortgage services. Through its internationally renowned Coldwell Banker Previews® program, the company is widely recognized for its expertise in the luxury housing market. Coldwell Banker Residential Brokerage, online at www.ColoradoHomes.com, is part of NRT LLC, the nation’s largest residential real estate brokerage company. NRT, a subsidiary of Realogy Corporation, operates Realogy’s company-owned real estate brokerage offices.  For more information please visit www.ColoradoHomes.com or call 925.275.3085.

Coldwell Banker Residential Brokerage Ranked Number One by Denver Business Journal

DENVER, Colo. – January 10, 2011 – Dever Business Journal

Coldwell Banker Residential Brokerage, Colorado’s leading real estate company, has once again been ranked number one in the six-county metro Denver area by the Denver Business Journal (DBJ).

In the publication’s latest list of the Denver area’s largest residential real estate brokerages, the DBJ ranked Coldwell Banker Residential Brokerage at the top with nearly $2.4 billion in total sales volume encompassing a total of 8,695 real estate transactions for 2009. The DBJ’s ranking of Denver area residential real estate brokerages was published on December 17, 2010.

“Coldwell Banker Residential Brokerage has now been ranked number one by the Denver Business Journal for 12 consecutive years,” said Chris Mygatt, president of Coldwell Banker Residential Brokerage in Colorado. “This is a remarkable testament to the quality of real estate professionals we attract.”

“We offer a high profile Internet presence, superior marketing programs, and excellent agent support,” Mygatt continued. “Coldwell Banker Residential Brokerage is also dedicated to providing the highest level of customer service possible in this highly competitive business. Congratulations to our outstanding broker associates who continue to achieve great things in our challenging market.”

About Coldwell Banker Residential Brokerage Coldwell Banker Residential Brokerage, a leading residential real estate brokerage company in Colorado, operates 14 offices with 1,115 sales associates serving the communities of the Denver area. The company offers residential and commercial brokerage, corporate relocation and mortgage services. Through its internationally renowned Coldwell Banker Previews® program, the company is widely recognized for its expertise in the luxury housing market. Coldwell Banker Residential Brokerage, online at www.ColoradoHomes.com, is part of NRT LLC, the nation’s largest residential real estate brokerage company. NRT, a subsidiary of Realogy Corporation, operates Realogy’s company-owned real estate brokerage offices. For more information please visit www.ColoradoHomes.com or call 925.275.3085.