What Every Homeowner Should Know Before Paying Additonal Principal To The Mortgage

Have you ever thought about your Freedom Point?

"Freedom Point" is one of the more important concepts in mortgage planning and yet it gets surprisingly little attention.

As its name implies, Freedom Point is the particular date when a homeowner’s liquid assets exceed his debts. At the Freedom Point, paying off a mortgage transforms from an obligation to a strategic financial planning decision.

My duty as a Mortgage Planner is to help my clients reach their Freedom Point as quickly and efficiently as possible. I achieve this by helping homeowners to make informed liability and mortgage decisions.

In my playbook, there are two very basic -- and very different -- approaches to accelerating a Freedom Point.

1. Prepay the mortgage by sending extra principal payments to the bank monthly, or annually
2. Leverage a "low payment" mortgage program and then invest the difference between the low payment and the payment of a 30-year amortized loan in an interest bearing account

Let's look at Method #1 in a chart:

In Method #1, a homeowner pursues a safe and predictable plan of attack on his $400,000 home loan. By over-paying the mortgage each month by $250 (as shown in the "30 Yr Redux" column), the 30-year fixed mortgage is paid in full and the homeowner reaches his Freedom Point in 23.3 years.

In eliminating 6.7 years off the mortgage, the homeowner saved $131,788 in mortgage interest payments.

Not too shabby!

Now, using Method #2, the homeowner uses a low-payment mortgage such as a 5-year ARM with interest only payments, or a 30-year fixed mortgage with 10-year interest only payments. But, he also calculates what the "full" mortgage payment would be if the loan was not interest only.

The difference in the two payments is invested and then managed in interest-bearing accounts.

In other words, instead of paying principal to the mortgage company, the homeowner pays the principal to himself and earns interest on it.

Let's look at the chart for Method #2:

In financial terms, this is called "compounding" and is the main reason why money in the bank is better than money under your mattress. The longer the bank holds your money, the more interest it earns over time.

Because of compounding interest, the homeowner using Method #2 reaches his Freedom Point in just 22.6 years.

Why Method #2 may accelerate the Freedom Point is a matter of simple mathematics. If properly managed, the homeowner’s accumulation fund will earn interest, and then the interest earned will itself earn interest.

But there's an additional benefit for homeowners using Method #2.

Having an "accumulation fund" provides additional liquidity. With money sitting in a bank account (and available at a moment's notice), a homeowner has more financial options in the event of a life emergency such as job loss or illness.

By contrast, extra principal paid into a mortgage is not recoverable without a remortgage.

And now it gets interesting.

Once a homeowner reaches his Freedom Point using Method #2, he holds power over his finances and is leveraging his home to the fullest. Because a properly-managed interest-bearing account is virtually risk-free, the homeowner can now choose to:

1. Use the accumulation fund to pay off his home in full
2. Leave the accumulation fund alone and continue to earn compounded interest on it

These choices would not be available using Method #1. Remember, when a person pays extra mortgage principal to the bank, those dollars are considered "locked up" unless the homeowner chooses to remortgage his home.

So, which Freedom Point strategy is best for you?

It all depends on your personal savings discipline, short- and long-term goals, investment rate of return and current financial situation.

A key starting point, though, is to sit down with a qualified mortgage planner to do a Freedom Point Review. Annually, your mortgage planner should monitor your progress and help you to make adjustments to your plan, as needed.

Reaching your Freedom Point is all about goal-setting, having a plan, and making informed decisions. If you're not confident that your current mortgage planner can help you make informed decisions to accelerate your Freedom Point, please call me or email me anytime.

What If The Energy Company Paid YOU Each Month?

This 30-second video was posted to YouTube and shows a home's electric meter running backwards after installing solar panels.

The meter runs backwards because the home is putting more power into the electric grid than it is taking out for itself.

With energy costs expected to rise sharply this winter and the costs of "going green" coming down, it may make sense to evaluate whether solar panels are a good fit for your home.

There's still that up-front cost, but then there's the thrill of watching that meter run backwards. Each clockwise tick is lowering your monthly energy bill and could possibly even eliminate it.

It's worth watching those 30 seconds again.

Buyers, You Will Pay More For A Home Than The Agreed-Upon Purchase Price

In real estate, the true cost of buying a home is always higher than the home's purchase price itself.

This is because of service charges from governments, lenders, and title/escrow companies.

Because there is no such thing as "typical" closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:

(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)

So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.

If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however. It's based on the home's purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.

Therefore, the home buyer's required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs. That adds up to $55,000, or 22 percent of the purchase price.

That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer. We're going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase.

They come in the form of "seller tax credits" and/or "seller concessions" and we'll cover those two concepts another day.

For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase.

If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.

Why You Should Remain In "Ready Position" For Your Mortgage Rate

Easy come, easy go.

There was a strong rally Monday afternoon in the mortgage bond market. It was sudden and furious, mostly coming on in the last 60 minutes of trading.

When markets closed, mortgage rates for conforming home loans were grazing their lowest levels in nearly two years.

It lasted overnight and into the early hours of the morning.

Then, several news pieces later, the financial markets turned.

By 8:30 A.M. ET Tuesday, the rally from Monday had been erased completely; mortgage rates were up by as much as 0.375% in some cases before the clocks struck noon on Wall Street.

The rally had been reversed.

Instances like this illustrate how financial market volatility can impact homeowners. A 0.250% change in rate, for example, equates to roughly $16.50 for every $100,000 financed on an amortizing loan. It's $20.83 for an interest only loan.

Those kinds of savings add up over time.

Americans are not in the market for new homes or new home loans every day, but when we are, it can be profitable to pay attention to markets and be ready to act on a moment's notice.

The markets won't "put rates on hold" for you while you make up your mind so that moment -- whenever it may come -- could represent tremendous savings long-term on a home loan. Be ready to act.

(Image courtesy: CompUSA)

It's A Good Time To Buy -- But Not For The Reasons You May Think

Since November 1, the following banks have written-down at least $1 billion in their respective loan portfolios:

• Bank of America
• Barclays
• Bear Stearns
• Citigroup
• HSBC
• Morgan Stanley
• Wachovia
• Wells Fargo

This is a big deal to people in the market for a home loan because when banks repeatedly take mortgage-related losses, it can lead to major risk aversion -- even for "good" borrowers.

It's one reason why mortgages are more difficult for which to qualify than in months past. Banks would rather pass on an "avergage" mortgage application rather than be stuck with a potentially "bad" loan.

If banks continue down this path throughout 2008, it means that buyers eligible for home loan financing today may actually be ineligible tomorrow. It could also mean that a home under contract may never close because the buyer's approval could be disqualified before the closing date is reached.

If you're a home buyer and your profile is not "ideal" to a bank, now may be a good time to write a contract because your mortgage options may get more thin very, very soon.

The Week In Review (November 26, 2007) : What To Watch For

In a holiday-shortened trading week, mortgage rates finished the week slightly improved.

But, because many traders had left early for Thanksgiving, matching buyers and sellers at any given price proved to be an exercise, to say the least. Mortgage rates bounced wildly as a result.

Between now and the New Year, expect more of the same volatility. Fewer market players means less stability in mortgage bond prices and, therefore, in mortgage rates.

This week, markets have a plethora of data to digest, plus they will be speculating about the outcome of this year's Holiday Shopping season. With more spending by shoppers, fears of a recession should wane, stabilizing mortgage rates somewhat.

On Tuesday, we'll see the Existing Home Sales report for October. There's nothing that should surprise us here -- the real estate story has been beaten to a pulp in the papers. Any figure below 5 million, though, will likely spark talk of a recession. That could be bad for mortgage rates.

The same can be said for Thursday's New Home Sales report. Remember that the difference between existing sales and new sales is that Existing Home Sales measures homes sold by a "homeowner"; New Home Sales measures homes sold by a developer/builder.

Then, on Friday, we'll be treated to the Federal Reserve's favorite inflationary measure -- the Personal Consumption Expenditures (PCE). PCE is expected to show 1.8 percent year-over-year growth, a figure generally believed to be neutral. If PCE surprises to the high-side, expect mortgage rates to rise on fears of inflation.

Black Friday Trivia

Today is "Black Friday", a day that many Americans get started on their Holiday Season shopping.

Did you know? The earliest known reference to "Black Friday" is November 29, 1975. The term was mentioned in two separate articles, both with Philadelphia timelines. Therefore, the term Black Friday is believed to have originated in Philadelphia.

Did you know? "Black Friday" was originally named with deference to other stressful and chaotic days such as Black Tuesday (the day of the 1929 stock market crash.

Store aisles were jammed. Escalators were nonstop people. It was the first day of the Christmas shopping season and despite the economy, folks here went on a buying spree. . . . . "That's why the bus drivers and cab drivers call today 'Black Friday,'" a sales manager at Gimbels said as she watched a traffic cop trying to control a crowd of jaywalkers. "They think in terms of headaches it gives them."

Did you know? The generally accepted meaning of "Black Friday" changed November 26, 1982. On that day, ABC News reported that Black Friday is the day that retailers' ledgers go from red ink to black ink, signaling profit. If this were true, companies like Wal-Mart and Target would show losses in the first three quarters of the years. They don't.

Did you know? Black Friday is not the busiest shopping day of the year. #1 is usually the Saturday prior to Christmas.

If you're out shopping today on Black Friday, remember to set a budget and stay within it. Good luck!

Sources
Purdue University News Service
"Christmas Shopping Facts and Figures"
Press Release, Nov. 22, 2000
http://www.newswise.com/p/articles/view/21693/

Black Friday (Shopping)
Wikipedia
http://en.wikipedia.org/wiki/Black_Friday_%28shopping%29

(Image courtesy: University of Southern Florida)

Who Are Fannie And Freddie And How Do They Help Homeowners?

Fannie Mae and Freddie Mae are quasi-government agencies in that they are publicly-owned, but overseen by the government.

The purpose of Fannie and Freddie is to make sure that money is available to homeowners that want home loans.

Neither lends to consumers directly, though; you'll have to talk to your loan officer for that. Instead, Fannie and Freddie's role is to buy loans from lending institutions that make loans to everyday people.

For example, all banks in America abide by laws limiting the amount of money they can lend as a percentage of their total asset base. If your home loan is on the books of Bank ABC, Bank ABC is, therefore, restricted in issuing additional loans because your loan counts against that ratio.

But, if Bank ABC sells the loan to Fannie Mae or Freddie Mac, your mortgage converts back into cash and Bank ABC can then lend again to somebody else.

Because of Fannie and Freddie, a bank can lend to multiple homeowners using the same asset base, thereby making sure that "the system" has plenty of money available for homeowners in need of loans.

In this sense, both Fannie and Freddie keep mortgage money flowing on the street level. But it only works to a point. Fannie and Freddie have very strict guidelines about what types of home loans they will purchase from banks and only accept loans that conform to their respective criteria.

Loans falling outside the criteria, by contrast, will not be purchased by the agencies.

This is why some mortgages are called "conforming" loans -- they conform to Fannie or Freddie's guidelines. The other loans fall into the categories of "Alt-A" or "sub-prime".

This also explains why Alt-A and sub-prime loans are harder to come by lately -- there's no government agency that guarantees to purchase these types of loans. Without that guarantee, banks are largely unwilling to tie up space on their balance sheets.

On Random Rate Rallies And Thin Trading

Mortgage bonds staged a late-day rally yesterday, exaggerated by the holiday-shortened week and because trader participation is light.

(We'll revisit this theme several times between now and the New Year so don't get tired of it.)

When mortgage bonds rally, it means that demand for them is strong and that pushes mortgage rates down.

Unfortunately for people shopping for loans right now, the rally happened so quickly that lenders did not have time to adjust their mortgage rate sheets before the market's closing.

This morning, rates are slightly higher.

The rally yesterday happened for a number of reasons including the November Homebuilders Index remaining at an all-time low. This illustrates the difficulty most developers are having in moving their inventory.

Another factor in the rally is that markets believe that the Fed is backed into a economic corner and will be forced to lower the Fed Funds Rate at its December meeting. This is happening despite (non-voting) Fed member Randall Kroszner implying in a public speech that the Fed may be entering a "Wait-and-See" mode and that further rate cuts would be imprudent.

There will be a lot of speculation about the Fed between today and December 11, the date of the next Fed meeting. Expect thin trading volume to make rates yo-yo until then.

If you see a rate and payment combination that makes financial sense today, better to lock it in than to wait for tomorrow. Rates may be on the upswing.

The Week In Review (November 19, 2007) : What To Watch For

In a holiday-shortened week with no major economic data releases, expect worries about the credit markets and speculation about holiday shopping to take center stage.

Last week was a mixed bag for the economy and mortgage markets responded in kind. Rates were relatively unchanged.

The news started with Wednesday's Retail Sales report. In showing a modest increase, the ongoing fears of a consumer spending decline were allayed.

This is good news for the economy as a whole because consumer spending accounts for roughly two-thirds of the U.S. economy -- even a small dip could push a precariously balanced economy into recession.

Unfortunately, this could be bad news for rate shoppers as individuals -- a slowing economy could drag down mortgage rates with it. And, with six weeks remaining in the Shopping Season, the American Consumer appears to want its presents.

Also making news last week:

1. CPI data showed that the Cost of Living increased 2.2% in the past year
2. Oil prices fell from its all-time high, reducing inflationary pressure on the economy
3. Gas prices fell nationally, shedding 3 cents per gallon according to GasBuddy.com.

This week, expect mortgage rates volatility as we get closer to Thanksgiving; fewer traders will be participating. With fewer buyers and sellers, it's harder to find "the right price" for mortgage bonds.

This same economic phenomenon may explain why it's easier to buy or sell a home in the Spring than in the Winter -- more market participants makes it easier to find a match.

Most important release of the week: Wednesday's University of Michigan Consumer Sentiment survey. If it comes in strong, expect positive reaction in stock markets which will, in turn, drag down mortgage bonds and push rates higher.

The Cost Of Living Includes The Cost Of Gas And Food (And May Get More Expensive Through The Winter)

October's Consumer Price Index was released Thursday and showed a 3.5 percent increase in the cost of living since October 2006.

The report also showed a core inflation rate of 2.2 percent. The "core CPI" is a smaller part of the overall CPI.

The math is the same, but it specifically excludes cost changes in energy products and food products because these two elements can be highly volatile.

When tracking inflation, therefore, economists tend to focus on core CPI instead of "regular" CPI.

Both are important -- Core for long-terms trends, and total for short-term consumer sentiment.

Inflation makes life more expensive and with more money spent to live, there's less money for savings and/or discretionary spending, and that slows down the economy.

USA Today ran a terrific quote from an accountant in San Diego on this topic:

"Have I been hit by rising energy prices? Hello! I live in the San Diego area, and I'm paying $3.41 a gallon," says Tage Woehl, an accountant. "On a 15-gallon tank, I'm spending over $50 per week. I find coupons when I can to eat, and seriously look at sales, because I'm spending a chunk more dough for gas than before."

And so, as we forge ahead towards the approaching Black Friday, the rate of inflation becomes very important to the U.S. economy. If consumers are feeling pinched, it's expected that they'll spend less, thereby slowing down the economy faster than was expected.

For home buyers and home sellers alike, this is bad news.

For buyers, mortgage rates may increase because the dollar should weaken; and, for sellers, homes may sit on the market longer because fewer buyers will qualify for mortgage loans at higher rates.

Source
TIPS, I-Bonds can help defang the inflation dragon
John Wagonner
USA Today, November 16, 2007
http://www.usatoday.com/money/perfi/columnist/waggon/2007-11-15-tips-treasuries_N.htm

Homeowners Should Have Basic Wills

Statistic #1: According to the Census Bureau, 69% of Americans are homeowners.

Statistic #2: According to lawyers.com, 42% of Americans have a basic will.

Basic Math: 27% of American homeowners are in need of a basic will.

Addressing mortality can be difficult for some people, but even more difficult is addressing a home that's been put in probate after a homeowner's death.

If you own a home -- whether you have a spouse, children, both, or neither -- it makes sense to speak with an estate planning attorney to understand your options.

Death is inevitable, so preparing for it is prudent.

Where You Find Speculators, You May Also Find Failures

This morning, RealtyTrac released its Q3 2007 foreclosure data for the United States.

The leading cities for foreclosures are:

1. Stockton, CA (1 per 31 households)
2. Detroit, MI (1 per 33 households)
3. Riverside/San Bernardino, CA (1 per 43 households)
4. Fort Lauderdale, FL (1 per 48 households)
5. Las Vegas, NV (1 per 48 households)
6. Sacramento, CA (1 per 48 households)
7. Cleveland, OH (1 per 57 households)
8. Miami, FL (1 per 60 households)
9. Bakersfield, CA (1 per 64 households)
10. Oakland, CA (1 per 71 households)

Looking more closely, we can see pattern.

California, Nevada, and Florida are well represented and that makes sense. Between 2002 and 2006, these areas were popular with speculators, many of whom used 2- and 3-year adjustable rate mortgages that did not require income verification, nor did they require down-payments in excess of 5 percent.

These loans are now adjusting and in 2007, mortgages for investors are more stringent. They typically require a 10-20% equity position and verifiable income.

With no mortgage options, no buyer bailouts, and no means to pay the bills, many speculators are choosing to walk away from their investments. Hence, the high foreclosure rates in California, Nevada, and Florida.

Rounding out the top 10 are Detroit and Cleveland.

Foreclosures in these cities make sense, too. Both have been decimated by job losses in the auto and manufacturing industries and without jobs, homeowners can't pay the bills.

In other words, foreclosures are often not the result of a "bad mortgage", but instead a "bad investment" or a "bad economy".

The entire list of foreclosures by MSA are available on RealtyTrac's Web site.

Policy Statement on Mortgage Industry Reform

LEGISLATIVE UPDATE
As was expected, the House Committee on Financial Services did approve H.R. 3915, which means that it will be sent for a vote from the full House of Representatives.

Two pieces of good news in that the surety bond/net worth requirements were removed and the committee did amend the restriction of Yield Spread, so that it is allowable on prime loans.

Committee chair Barney Frank (MA) and Representative Gary Miller (CA) commented that they would continue to work together toward addressing the YSP issue and the ability of consumers to finance origination fees and costs.

~ ~ ~

Original Proposed Solutions to the Problems Facing the Mortgage Industry

There are many proposals currently being floated in Congress that call for major changes in the way mortgage loans are originated. One of the most comprehensive proposals is House Resolution 3915 The Mortgage Reform and Predatory Lending Act of 2007.

Although many of these proposals (including HR 3915) contain numerous consumer protections, they also contain clauses that are very harmful to both the mortgage industry and homeownership in general.

The plan we are proposing consists of three simple guidelines that are practical, cost-effective and easy to implement:

Guideline #1 - The government should require state licensure, federal registration and private certification of all mortgage originators, including brokers and bank loan officers.

• State Licensure – states should mandate that all loan originators (including brokers and bank loan officers) obtain a license to originate loans in that state.
• Federal registration – the federal government should mandate that all states share licensing information in a federal registry. This will enable the states to have easy access to information about criminal background checks, adverse actions and other steps already taken regarding an individual’s license in other states.
• Private certification – brokers and bank loan officers should be required to be certified and meet minimum education and ethical standards in order for the loans they originate to be purchased by secondary market investors. Certification programs should require testing, ethical standards and annual continuing education.

This guideline would result in very little cost to the government as regulators would simply be charged with approving and monitoring the various certification programs in the marketplace. The certification programs would be charged with self-policing their participants.

Guideline #2 – If a mortgage originator doesn’t adhere to the standards set forth by their certification(s), they will be subject to penalties and lose their license to originate loans.

In order to be effective, a certification needs to have teeth. Rules are useless unless there is also a method in place to enforce the rules. Certification programs should terminate members based on violations and report violations to the proper state authorities. Depending on the nature of the violation, the states should impose penalties and/or revoke the originator’s license to originate loans. These adverse actions can then be automatically reported to other states through the federal registry resulting in violators being precluded from simply setting up shop in another state and repeating their unscrupulous behavior.

Guideline #3 - Require mortgage banks and secondary market investors to incur penalties and legal liability unless the loans they originate / purchase are originated by mortgage originators who are certified.

This would eliminate the fears and concerns of many financial institutions, banks and secondary market investors. They would only face legal liability if they fall back into their old ways and start buying loans recklessly from originators who are neither qualified to give consumers the right mortgage advice nor committed to high ethical standards of practice.

Beware of Danger:

None of the legislative proposals currently being considered are as straightforward as the proposal outlined in this policy statement. While some proposals have similar elements, there are many proposals that actually contain some very dangerous and harmful elements like the following:

Elimination of Yield Spread Premiums (YSPs)

Mortgage brokers make their living through commissions they earn from the wholesale lenders to whom they broker loans. These commissions are called yield spread premiums (YSPs) and are in most cases fully consistent with the commission schedules that are used by bank loan officers.

However, brokers tend to have more latitude than bank loan officers in pricing their loans. This can be very beneficial to consumers as brokers can sometimes be more flexible than bankers in terms of pricing out various point and interest rate scenarios on many loan programs.

One loan program that would be virtually outlawed under this proposal would be the no-cost refinance where the broker uses their YSP to pay the borrower’s closing costs. The very clause that is intended to protect consumers would result in harming them and increasing their refinancing costs.

Fiduciary Responsibility, Suitability Standards and/or “Net Tangible Benefit” Requirements

Proposals that call for requiring a federal fiduciary standard for mortgage originators or a “net tangible benefit” requirement for mortgage loans are impractical for the most part and will result in costly and unnecessary litigation within the mortgage industry. Secondary market investors would refuse to buy and securitize loans, bankers would refuse to issue loans, and brokers would refuse to originate loans – all out of fear that the consumer will come back and say, “You shouldn’t have sold me the loan in the first place.”

Furthermore, a federally-mandated standard would put the government firmly in the driver’s seat when determining which loans are suitable for consumers. It would be much better to allow consumers to make their own personal financial choices without government interference. Rather than imposing a federally-mandated “net tangible benefit” requirement with no practical way of enforcement, a better solution would be to implement the three guidelines proposed in this policy statement.

Legislating Underwriting Guidelines
Proposals that call for federally-mandated underwriting guidelines will greatly limit market-based innovation and snuff out many of the financial choices available to consumers. One of the greatest benefits of living in the US is the myriad choices we have when it comes to investments, homeownership, lifestyle, etc.

Government-decreed lending guidelines are not consistent with the personal freedoms inherent in the American way of life. Rather than jumping into the mortgage business, governments should simply require the industry to act in a responsible manner by implementing the three guidelines proposed in this policy statement.

Conclusion:

The three guidelines proposed in this policy statement are a roadmap to solving the problems being faced in today’s mortgage industry. The CMPS® community already consists of over 4,600 participants working together in this regard through certification, training, testing, continuing education and enforcement of the CMPS® code of ethics.

The mortgage planning process embraced by CMPS® professionals requires mortgage originators to work diligently in providing borrowers with a list of mortgage options and a comparison of the financial costs and benefits associated with these options. For more information on the mortgage planning process, please reference the attached article entitled Mortgage Planning Process.

______________________________________________________________

NOTE:
To receive a copy of the Mortgage Planning Process article that accompanied the original proposal, please send your request to: Samuel_AT_PIMTG.com (replace "_AT_" with "@").

The Week In Review (November 13, 2007) : What To Watch For

The Dow Jones Industrial Average and NASDAQ shed 4.1% and 6.5%, respectively, last week.

Normally, this would be good news for mortgage rates because investors tend to look for "safe havens" in bond issues, but instead, just treasuries benefited last week. Mortgage bonds were left in the dust.

Mortgage rates finished to the upside after a week without hard data and one in which psychology and momentum ruled.

This week figures to be different.

Since the Fed's decision to lower the Fed Funds Rate two weeks ago, there hasn't been much hard data for market players to digest. This week, we'll get an overdue look at how American consumers are dealing with inflationary pressures with the releases of October's Retail Sales and CPI data.

Retail Sales hits the wires Wednesday morning and consumer spending represents two-thirds of the U.S. economy. Therefore, this very important data point will be closely watched because it could be foreshadowing how Americans will spend through the all-important Holiday Season.

If Retail Sales surprises to the strong side, mortgage rates may increase on worries over inflation. If Retail Sales surprises to the weak side, mortgage rates may decrease on worries over recession. Either way, there's no real room for error if you are floating your mortgage rate right now so locking prior to Wednesday may be prudent.

Then, on Thursday, the Consumer Price Index figures from October will hit the wires.

CPI is a popular measure of inflation and is expected to show that the average "cost of living" increased by 0.3% in October overall, and 0.2% if we exclude the highly volatile prices of food and energy.

Because inflation is the enemy of mortgage bonds, stronger-than-expected CPI data would be expected to push mortgage rates higher.

(Image courtesy: The Wall Street Journal Online)

Just The Facts

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

Deflation is a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

Stagflation is a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!

Brought to you, courtesy of The Mortgage Market Guide

The Simple Math Of How Mortgage Rates Are Born

We talk a lot about how mortgage bonds are the driving force behind mortgage rates, but we never get into the math of it. So, to help our understanding of the subject, let's delve a little deeper.

Here's the (very simplified) math behind it:

If you pay $100 today for a $6 annual interest payment over 30 years and then you get your $100 back, you would have earned 6.000% on your money.

But, if you paid $98 today for that same $6 annual interest payment, your rate would have be 6.122%.

If you paid $102 today for that same $6 annual interest payment, your rate would have be 5.882%.

Because the interest rate of a particular bond never changes, we can see how lower price leads to a higher yield, or rate, and vice versa.

This basic math is why mortgage bond prices and mortgage rates move in opposite directions.

Now, the price of mortgage bonds is determined by the demand for them. When demand for mortgage bonds increases, the price for mortgage bonds increases.

• If you paid $102 today for that same $6 annual interest payment, your rate would have be 5.882%.

By contrast, when the demand for mortgage bonds falls, the price for mortgage bonds falls, too.

• But, if you paid $98 today for that same $6 annual interest payment, your rate would have be 6.122%.

And, as we can see in the examples above, as bond prices rise and fall, the relative yields (i.e. rates) of those bonds move in the opposite direction. Lower prices translate into higher rates, and higher prices drive rates down.

For more on how mortgage bonds prices work, check with Google.

Mortgage Rates Fall For ARMs Faster Than For Fixed Rate Mortgages

After running neck-and-neck for several months, interest rates for fixed-rate mortgages and adjustable-rate mortgages are finally diverging.

Despite pricing worse than its fixed-rate counterpart throughout much of August and September, ARMs are now close to 0.375 percent lower for conforming products sold through Fannie Mae and Freddie Mac.

This equates to roughly $25 per month per $100,000 borrowed.

If you know that you don't need a 30-year rate commitment from your lender, you may find that a well-structured ARM is a real money-saver.

(Image courtesy: Bankrate.com)

It's Not Your Imagination : Getting A Home Loan Is More Challenging For Everyone

If it feels like mortgage approvals are harder to come by than in years past, that's because it is.

And we're not just talking about sub-prime mortgages (for which the market has nearly vanished in just 12 months).

According to a story on Marketwatch, mortgage guidelines are more challenging for everyone to meet -- gold-star credit borrowers included.

The Federal Reserve conducts a quarterly survey of senior bank lending officials and in its most recent survey, nearly half of the banks said that their respective underwriting processes have tightened, forcing borrowers to "jump over a higher bar" in order to get approved.

As a home buyer and/or homeowner, you can't do much about the banks, or the mortgage markets. But, you can make strides to improve and make your personal application stronger and increase the likelihood of an approval.

That process starts with your credit score.

If you're planning to make a move within the next 12 months, know that it's never too soon to get a credit consultation from a trusted mortgage planner or other financial professional. Yes, banks are now demanding more strength in income and in assets before approving loans, but without sound credit history, those other two factors may not matter at all.

The mortgage approval process will likely get more difficult before it begins to get easier. Therefore, take proper steps to review and repair your credit (if necessary) well in advance of needing a home loan. Time heals credit blemishes and you may find that it's the difference maker in getting a lender's mortgage approval.

Source
Unprecendented tightening in lending standards
Marketwatch
Rex Nutting
November 5, 2007. 3:06 P.M. ET

Why Driving Extra Miles For Cheaper Gas May Be A Waste Of Money

With gas prices up 37% nationally since this time last year, Americans have grown accustomed to driving a little bit further just to find a "gas bargain".

But, is it worth it?

Based on today's national average gas price of $3.00 and assuming a 15-gallon fill-up and a 20 miles-per-gallon vehicle, a car owner would need to see 1 cent savings per gallon at the pump for each extra mile driven in search of better gas prices.

Broken down:

If gas costs $3.00 per gallon and the car gets 20 miles per gallon, it costs 15 cents/mile to drive the car.

If the car fills up with 15 gallons, a one-penny savings per gallon would yield 15 cents in savings.

15 cents is the same amount of money it cost to drive the extra mile to the "cheaper" gas.

This isn't an absolute, of course. The one-penny-per-mile rule varies according to several factors:

1. The gas mileage of your vehicle: The worse your car's gas efficiency, the fewer miles you should drive to find less expensive gas.
2. The savings at the pump: The greater the savings at the pump, the more miles you should drive to fill-up at that gas station
3. How much fuel you plan to buy: The larger your car's gas tank, the farther you should drive for savings.

The best way to save money on gasoline is to curb automobile usage and follow good driving practices. Then, trying using gasbuddy.com to find inexpensive fueling options in your area, listed by zip code.

The Week In Review (November 05, 2007) : What To Watch For

As we saw last week, the economy is simultaneously hot and cold. This makes for a strange ride on Wall Street because stocks and bonds tend to move on emotion rather than on fact.

This "mob mentality" is one reason why mortgage rates have bounced up and down so much lately.

For example, we saw the following signals of economic weakness last week:

• The federal reserve cut the Fed Funds Rate by 0.250%
• Consumer Confidence surveys revealed a two-year low heading into the holidays
• Financial stocks showed dramatic weakness

But, countering that weakness, we saw these strengths:

• 166,000 jobs were added to the economy in October, nearly doubling expectations
• Third-quarter GDP rose 3.9%, higher than was expected
• Inflation (as measured by PCE) was held in-check at 1.8% annually

This week, with few economic releases that truly matter to traders, expect that markets will likely trade on questions like:

1. Will the weakening dollar eventually punish the U.S. economy?
2. Is the rising price of oil going to hurt holiday season sales?
3. Is the credit crisis over, or just on a pause?

If traders feel confident in their "answers" to these questions, momentum will quickly build in the mortgage bond market, pushing mortgage rates in one direction or the other.

While mortgage rates are expected to remain somewhat flat this week, an unforeseen event or development could shake that balance loose. Any reaction to new news could be swift so don't wait to lock your mortgage rate -- the best rates of the week may be today.

(Image courtesy: Wall Street Journal Online)

It's A Terrific Time To Revisit Your Mortgage Rate

If you bought your home in 2007 and your mortgage is a conforming home loan, you may be able to take advantage of the current mortgage market conditions and lower your mortgage rate.

As of this morning, mortgage rates are near their lowest levels of the year.

Of course, not every conforming borrower is eligible.

For example, if you bought your home without a downpayment, or if your home has decreased in value since your purchase date, you may not be eligible. Most other homeowners are.

Mortgage rates change every day -- just like stock prices -- and when the economy shows growth, mortgage rates tend to worsen. Wednesday, the Fed remarked that the economy is nearly in balance and is not declining as much as had been expected. That means that the current level of low rates may not last much longer.

If you're wondering when a good time to remortgage would be, now would be it. We just can't predict if the savings will be there much longer.

(Image courtesy: Bankrate.com)

Making English Out Of Fed-Speak (October 2007 Edition)

The Fed lowered the Fed Funds Rate by 0.250% yesterday. The widely-expected rate decrease was well-received by stock markets to the detriment of mortgage bonds. Mortgage rates climbed higher yesterday afternoon as demand for mortgage bonds waned.

This further illustrates that the Federal Reserve does not control mortgage rates. The FFR fell; mortgage rates rose.

Because it is tied to the Fed Funds Rate, Prime Rate fell by 0.250% yesterday, too. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.

In the statement above -- as explained by The Wall Street Journal -- the Fed expresses concern about the housing slump while noting that the economy seems to be finding a balance. This means that future rate cuts are less likely.

Source
Parsing the Fed Statement
The Wall Street Journal Online
October 31, 2007
http://online.wsj.com/mdcapp/public/page/2_3024-info_fedparse_shell.html