Fickle Mortgage Market Demands Quick Decisions
If You Find a Great Rate, Grab It, Consumer Advocates Say

By Dina ElBoghdady
Washington Post Staff Writer
Saturday, September 20, 2008

Just about anyone who cares knows that interest rates on a 30-year, fixed-rate mortgage have dropped recently.

But by the time you figure out what that means for you, it could all change.

With the world's financial markets in uncharted territory, trying to get a handle on what's likely to happen to mortgage rates has become more baffling than usual.

The rates on plain vanilla 30-year, fixed-rate loans tumbled after the government seized control of mortgage financiers Fannie Mae and Freddie Mac on Sept. 8. The following week, loan applications from borrowers eager to refinance shot up 88 percent, while those from people looking to buy a home went up 5 percent, according to the Mortgage Bankers Association.

But when the global financial markets went haywire in the middle of this week, that havoc translated into a quick spike in mortgage rates. Still, the average rate fell for the fifth consecutive week, to 5.78 percent, from 5.93 percent the previous week and 6.34 percent a year ago, according to a Freddie Mac survey.

The bottom line, echoed by many consumer advocates, is that if you're shopping around for a loan and you find a rate that works for you, grab it. Do not risk a botched deal by waiting for a lower rate, said Keith Gumbinger, a vice president at research firm HSH Associates. "In these highly volatile market conditions, your opportunity to get that deal completed may be fleeting," Gumbinger said.

Here are some issues to consider if you're thinking of buying a home or refinancing your loan. The answers are based on advice from Gumbinger; from Greg McBride of the personal finance Web site; and from Gibran Nicholas of CMPS Institute, which trains and certifies mortgage bankers and brokers.

Q Can I lock in a mortgage rate even if my closing is many months away?

AYou might be able to, but it may cost you. "You are basically asking the lender to bear interest rate risk over a longer period of time, and they may make you pay a pretty penny for that," McBride said. Generally, extra charges come into play when you lock in a rate past 30 to 45 days. Pin down the timing with your lender and get it in writing to avoid confusion.

If I locked in a rate, can I still benefit if interest rates decline later?

Some lenders will offer a "float down" option up front that will allow you to do that. It, too, will cost you. The cost could be reflected in the rate you're quoted. Without a float down, the lender is under no obligation to renegotiate. As a practical matter, some will do so just to keep a customer from walking away. But if you do walk, they can keep the fee that most lenders require when locking in a rate.

Why do lenders resist renegotiating the rate?

Many lenders sell their loans to investors. Fannie Mae and Freddie Mac, for instance, buy those loans, then sell them as mortgage-backed securities to investors. The investors expect the lender to deliver the loan at the promised rate or else they will not get the returns they were counting on, Nicholas said. If the lender fails to deliver, the lender eats the cost.

Does it always make sense to refinance when the rates go down?

It depends. The cost of refinancing may exceed the savings, Nicholas said. Find out if your lender will charge points or require you to pay for a new appraisal and title insurance. Some lenders offer no-cost loans. Also, keep in mind that if your home value has dropped to the point where you now owe more than 80 percent of the home's value, you will have to pay private mortgage insurance on a new loan.

I have an adjustable-rate mortgage tied to LIBOR. I read that this rate shot up this week. What does this mean for me?

LIBOR -- the London Interbank Offered Rate -- is an index that measures what banks pay when they borrow money from one another for a certain period. This week's spike was tied to how much they borrow overnight. Some adjustable loans may be tied to the overnight rate. But more commonly, they are tied to borrowing that takes place over one month, three months, six months and 12 months. This means that most people with an adjustable-rate mortgage will not be affected by the increase.

The rate on my adjustable loan is much lower than the going rate on a 30-year, fixed-rate loan. Is there reason for me to refinance?

Fixed-rate loans are a sensible choice for most borrowers given today's low rates, McBride said. Having monthly payments that stay the same for the life of the loan enables you to better plan your budget and insulate yourself from shock should rates rise. But there are valid reasons to keep an adjustable loan. For instance, if you plan on selling your home before your loan adjusts, it makes little sense to refinance into a higher rate.

Why is it that the rates on fixed-rate loans are generally higher than the rates on adjustable-rate loans?

Fixed-rate loans pose a higher risk for lenders. With fixed-rate loans, lenders bear the risk of financing a mortgage that borrowers can then refinance without penalty if rates go down. With adjustable-rate loans, borrowers bear the risk of rates going up in the future, so lenders entice them with lower introductory rates.

What's the difference in rates these days between adjustable and fixed loans?

The spread between the two has diminished. An HSH survey found that 30-year, fixed-rate loans closed at an average 6.02 percent a week ago. The average for an adjustable-rate loan that resets in five years, then every year thereafter, was 5.94 percent. The difference might not be worth the risk, Gumbinger said.

I have good credit and I can document my income, so why was I turned down for a loan?

Good credit and proof of income are two key things lenders demand these days. But there's an equally critical third factor: a hefty down payment if you're buying or sizable equity if you're refinancing. Without those, you will be turned away or you may not get the best available rates. If you owe more than the house is worth, working with a lender to modify your loan terms may be the only way to improve your situation.

But I made a hefty down payment when I bought my home and I still can't refinance. How come?

The equity may be gone through no fault of your own. Prices have dropped in most parts of the country. Equity may be wiped out even for a borrower who recently put 20 percent down.

How do I figure out how much equity I have in my house?

The formula is simple: Market value of the home minus what you owe. The tricky part is determining the market value. Lenders order appraisals for that purpose and charge upfront for the service.

What if I don't agree with the results of the appraisal?

You may end up picking up the tab for a second appraisal. But beware: "Some lenders only allow you to use an appraiser from their approved list, and some won't allow you to get a second opinion," Nicholas said. Always check the lender's policy. Consider doing your own research first. Check, and other Web sites to find out what similar homes in the neighborhood sold for.

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