The most-asked questions by home mortgage borrowers so far in 2010 are about where rates will go, how to lock rates in a volatile trading environment, and how home appraisals affect the lending process. Each question is addressed below.
Where Will Rates Go By Summer?
Rates on loans up to $417,000 are about 5% as of mid-February, and rates could rise as much as .5% by summer for three macro reasons: (1) The Fed will end it’s $1.25t mortgage bond buying program March 31, and then we’ll likely see profit taking on mortgage bonds as private investors sell, which pushes prices down and yields, or rates, up; (2) An improving economy and resulting inflationary fear will cause mortgage bonds to sell off because inflation eats up bond returns, so this would also push bond prices down and rates up; and (3) Inflation will cause the Fed to start hiking short rates from current near-zero levels. Global investors currently borrow on these short-term rates to buy long-term securities with higher returns. When short rates rise, it will erode the benefit of this interest rate trade and force selling of long-term securities—including mortgage bonds—to repay short-term loans. That selling will also push rates higher.
How Do You Decide When To Lock A Mortgage Rate?
We can expect continued rate volatility as markets struggle to interpret the impact daily economic indicators have on the aforementioned macro rate factors. For now, rates are holding close to record lows, but intraday rate swings can be .25% to .5% as mortgage bonds trade on different interpretations of daily economic data. So how do you decide when to lock a rate? You need to set a rate target with your mortgage advisor based on current trading ranges and estimated results of upcoming economic data, and you need to be ready decide on a rate lock based on those rate expectations. If it looks like rates will trade above that target, it’s time to lock your rate—this includes locking ahead of economic releases that might have surprise results: better to lock at your target than having rates trade the wrong way on surprise data. It’s a very simple strategy, and making the lock decision process more complicated than this adds unnecessary stress.
How Does The Appraisal Affect The Loan Process?
Loans are made on both borrower and property qualifications. A critical element of property approval is the appraisal report. Appraisal regulations implemented May 2009 have caused appraisals to become much more than just value reports. Appraisals now often highlight repairs and/or damage to the property. An appraiser calls out these items using notes and/or photos, and a bank underwriter approving the loan has the right to ask that repairs noted in the appraisal be cured prior to funding the loan. So if you’re pre-approved as a borrower, your next step is to inform your mortgage advisor about the condition of the subject property. Visible water damage, cracked paint inside or out, and any damage to external wood (e.g., decks, siding, etc.) are all examples of items that can be flagged as prior-to-funding repairs. In the same way you share all of your financial information to get pre-approved for a loan, be sure to share all property condition information as well.