Real Estate NewsMonday Mortgage Review, February 5th
Interest Rate Activity During The Past Week
Mon
Tues
Wed
Thurs
Fri
30-Year Fixed
6.81
6.80
6.81
6.77
6.69
15-Year Fixed
6.42
6.41
6.41
6.38
6.32
1-Year ARM
6.61
6.55
6.55
6.53
6.50
Jumbo
7.37
7.35
7.34
7.29
7.22
Data Source: Bank Rate Monitor
Commentary
Rates during the week fell -- and why not? Despite a huge rush to refinance, the big news came from Washington and further interest cuts by the Federal Reserve.
Is the Fed"s .5 percent rate cut the last we"ll see for awhile? Or is it one step in a series of rate reductions to be announced?
No one knows, of course, but the basic point is this: Fixed-rate loans look very good right now.
Conversely, adjustable-rate mortgages -- ARMs -- remain unappealing. At the end of the week ARM start rates were just .19 percent below fixed-rate levels for 30-year financing. For ARMs to win more consumer interest, their pricing will need to fall significantly when compared to fixed-rate products.
Notes
*Thirty-year, fixed-rate financing with 20 percent down, a conventional loan, consists of a mortgage with 360 monthly payments of equal size and an interest rate which remains constant throughout the life of the loan. At this time, conventional fixed-rate loans of up to $275,000 are available in the lower 48-states. In Hawaii, Alaska, Guam, and the U.S. Virgin Islands the loan limit for fixed-rate conventional financing is $412,500.
*Fifteen-year, fixed rate financing has a larger monthly payment than a 30-year loan, but lower interest rate and a smaller potential interest cost. Example: Suppose that the current interest rate for a 30-year fixed-rate conventional mortgage is 7 percent and the interest rate for a 15-year loan is 6.80 percent. For a $100,000 loan, the 30-year borrower would pay $665.30 per month for principal and interest. The total interest cost over 30 years (360 payments) would be $139,508. For the borrower who tales out a 15-year fixed-rate loan for $100,000, the monthly cost for principal and interest would be $887.68. Over 15 years (180 payments), the total potential interest cost would be $59,978.
*A jumbo loan is, essentially, a 30-year mortgage but with a loan amount above the conventional loan limit, in this case $275,000 for a single-family home in the lower 48 states. Because a larger loan amount is outstanding, lenders have more risk and so interest rates are somewhat higher than for conventional financing.
*An adjustable rate mortgage (ARM) is a form of financing which typically has an initial "start" rate lasting six months or a year, and then rates which change on a regular schedule. Because the interest rate changes, monthly payments can also rise or fall. The interest rate changes are based on an index not controlled by the lender such as the average price of Treasury bills over six months or a year, loans made by the Federal Home Loan Bank in San Francisco to lenders in California and Nevada (what"s known generally as the11th District Cost of Funds Index), and the LIBOR rate (the London Interbank Offer Rate, a measure which relates to the cost of borrowing in Europe).
Most ARMs have annual and lifetime interest caps, and also annual and lifetime monthly payment caps. Some ARM mortgages allow lenders to collect "negative amortization," an expression which means the interest cost is greater than the monthly payment, so the size of the debt increases.
*Interest rates are calculated at a given percentage of the loan amount per year, say 7 percent annually. A basis point is equal to 1/100th of 1 percent. Thus if a loan interest rate moves from 6.60 percent to 6.65 percent, it has gone up .05 percent or 5 basis points.
*Loans have a nominal interest rate, say 7 percent, and an annual percentage rate (APR). The APR is important because it includes not only the interest rate, but also such costs as points (loan discount fees), per diem interest, mortgage insurance and other expenses.
Be aware that the rates presented here may not reflect the rates for individual loan products at any given time, and that rates are constantly in flux. For additional information regarding current mortgage rates, please consult the Bank Rate Monitor