Archive for September, 2007

A half down. A quarter up.

September 20, 2007

Hmmm . . . A half down.  A quarter up.

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A baby’s midnight bottle. 

Or, what you get when the Feds lower rates; mortgage rates go UP. 

The Feds threw a bit of a curve-ball this week after their meeting on Tuesday, announcing to cut the Federal Funding rate and the Discount Rate by 0.5%.  While most economists were anticipating a cut in rates by the Feds, most were leaning towards a more conservative 0.25% cut.  As expected, talk around the water-cooler, advice from well-meaning in-laws and even the front page of yahoo.com is all a-buzz about the good news for mortgage rates and the housing market . . . a half-a percent lower, right!?  Nope.  More like 0.25% higher.

In case you missed last week’s post (and the link in that post to my article on the Feds and the Federal Funding rate), here is the short to medium answer:  the Federal Reserve is charged with helping to control inflation.  Their main tool for doing this is by raising and lowering the Federal Funding rate.  This rate  is the benchmark rate that banks use to borrower money from one another and to lend to customers — mainly on car loans, credit cards and second mortgages.  When the Feds lower the Federal Funding rate, banks lower prime rate (and the LIBOR index will soon follow for all of you soon-to-adjust ARM mortgage holders).  Banks can do business for less; consumers can borrow for less; and the cut in rates  generally helps to spur on the economy.  One the other hand, too much economic growth (and even the potential and/or fear for too much economic growth in the near future) puts pressure on the long-term return on bonds, causing bond prices on mortgages to fall, and as prices fall, the yields go up, and as the yields go up, so do mortgage rates. 

Confused yet? 

Think of it this way.  Suppose I am going to loan you money at a certain rate for 10 years.  Let’s say that I plan on making $30,000 in interest over that 10 years (I’m going to buy a car with my profits — a brand-new model year, super-cool, whatever-car).  BUT, because of inflation, 10 years from now, that $30,000 dollars will no longer be worth the same $30,000 as it is today.  In other words, because of inflation, the $30,000 car that I had my eye on today, (fast-forward ten years) now costs $36,569 (based on 2% inflation per year).  So, now, if I want to make the same profit (enough to buy that new car), I am going to have to charge you a higher rate of interest on that 10 year loan.  If I am worried that inflation is going to increase even higher than the 2%, I’d have to charge you an even higher rate.  The higher the worry (fear of inflation), the higher the rate.   I realize there are some flaws to the analolgy and a car, but (assuming the base price of a new model year car goes up at the rate of inflation) . . . well, hopefully, you get the idea.

So, while the Feds move is nice for the economy — and nice for those home equity lines of credit, credit cards and car loans — the idea of too much of a good thing (too much growth in the economy too fast), has caused mortgage rates to go up.  So where are rates headed from here??  Stay checked-in to “the Mortgage Blog” and I’ll keep you posted.  Like Carnac, I can only tell you what is coming next (rates will be higher tomorrow).  Unfortunately, I can’t see in to the future.  It’s not like I have 1.21 gigawatts of electricity and one of these . . .

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Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.  

Down means down, but down means up; up means up, but up means down.

September 13, 2007

No, this is not the beginning of a Dr. Seuss book . . . and it’s not the beginning of a philosophical discussion about relativism and post-modernism — or any “ism” for that matter.  And (because there are already 490,000 google findings on the topic), it is not about whether or not the movie Gladiator correctly portrayed the emperor’s decision to show mercy or have a gladiator put to death.  Did up mean down? or down, up?  Or . . . you get the point. 

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This post is about rates.  Specifically, the “rates” that have made the speculative news this week and will hit every news station in the country next week (and will inevitably make my telephone ring off the hook) — the Feds are LOWERING RATES (probably).  What does that really mean?

Well, most people (hence the phone calls) assume that the Feds control mortgage rates, and when they “lower rates” that this has an instant impact on mortgage rates.  This is not at all the case.  The rate controlled by the Federal Reserve is called the Federal Funding rate.  This rate is the benchmark rate that banks use to borrower money from each other in order to meet their mandated reserve requirements.  By lowering the Federal Funding rate, the Federal Reserve decreases the overall costs of doing business for the banks (the projection is that they will lower by 0.25% or 0.5% after next Tuesday’s meeting).  This savings is passed on to bank customers in the form of a reduction in prime rate (which follows the Federal Funding rate exactly); and a reduction in prime rate has a direct impact on credit card rates, car loans, second mortgage rates and home equity line of credit rates. 

Strange but true, mortgage rates often move in the OPPOSITE direction of the Fed’s move in rates.  For more details on why this happens, check out my previous post on the subject here.

So why all the up, down, look-all-around business?  Here is why . . .

If the Feds lower rates (the Federal funding rate), prime rate will go down, your credit card rates and your home equity line of credit rates will go down, but mortgage rates could go up.  The sentiment of the mortgage-backed securities market — and the future movement of mortgage rates — will be more concerned and focused on the statement and comments from the Federal Reserve (more so than their movement in rates). 

If you are still confused, send me an email, give me a call or post a question or comment on the blog and I’ll do my best to answer your questions.  I hope this post serves you well . . . my name is Mortgage Broker.

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Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.  

Free credit report dot com is not really a free credit report.

September 6, 2007

So, I admit, there are a lot of people out there who are smarter than I am.  There are also lots of people who have figured out ways to make a lot more money than I make.  But the idea of a (not-really-free) free credit report is insanely genius . . . or maybe idiotically mischievious.

Did you know that a free credit report from freecreditreport.com is not really free!?  The receipt of the “free” credit report enrolls you in a free 30-day trial of their credit monitoring service which will cost you $12.95 per month unless you cancel.  So, the report really costs you $155.40 per year.  But, to their credit, assuming you could re-pull your credit multiple times, the cost per report would go down.  But because most creditors update credit information once a month, it would only make sense to pull your credit report every 30 days or so, so each report would end up costing you $12.95 — the monthly fee.  BUT, if you pulled your credit every single day of the year (kind of like eating WAY too much at an all-you-can-eat buffet to get your money’s worth), the cost would go down to $0.42 per report.  I suppose 42centcreditreport.com wasn’t such a catchy name.

So here is what I am thinking I should do . . .

hillsidelendingfreemortgageloan.com — When you obtain a mortgage loan with hillsidelendingfreemortgageloan.com, you will begin your payment-free trial membership in our Deed to Secure Debt 360 PlanSM. If you don’t cancel your membership (and by cancel your membership, we mean, payoff the loan for the money that you borrowed, like $250,000 for example) within the 30-day intro period, you will be billed $1,215.00 (based on $250,000) for each month that you continue your membership.  You will continue to be billed this amount (plus a monthly amount for taxes and insurance) for the duration of the Deed to Secure Debt 360 PlanSM.  This program will automatically terminate at the end of 360 months (or 30 years). 

Now, before you rush off to register hillsidelendingfreemortgageloan.com in the hopes of beating me to it and then selling it back to me for thousands of dollars, let me tell you this . . .

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 “Go sell crazy somewhere else.  We’re all stocked up here.”

For a free credit report that is actually a free credit report, visit www.annualcreditreport.com where you can obtain a your report once every 12 months . . . for free . . . no credit card required. 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.