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Why Do Mortgage Rates Change?
To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates!
- Prime rate: The rate offered to a bank's best customers.
- Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
- Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
- Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
- Federal Funds Rate: Rates banks charge each other for overnight loans.
- Federal Discount Rate: Rate New York Fed charges to member banks.
- Libor: : London Interbank Offered Rates. Average London Eurodollar rates.
- 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
- 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
- Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
- Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.
This leads to a fundamental concept:
- Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
- Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.
Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!
There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity––typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.
Your mortgage rate is determined by several factors:
- Your credit score
- The overall financial markets
- The points you pay
- The loan program you choose
Compare a variety of loan programs before you move forward.
If you pre-qualify or get “pre-approved” for a loan before you buy a house, the lending institution will commonly “lock-in” your interest for a set period of time, normally 30 days. If you do not close on your real estate transaction during this time, your interest rate is subject to change.
Bankruptcy Info: (disclaimer, this is a helpful resource but by all means not legal advice, which of course should be obtained from your attorney. Bankruptcy laws also vary by state)
Bankruptcy Questions and Answers
I am a co-signer for a debt, how does bankruptcy affect my
obligation?
If the debt is a dischargeable debt then you will not have to pay it. However,
the cosigner will become primarily responsible for the debt. Be sure to list the
co-signer as a creditor in your schedules as they have a contingent claim
against you.
Can I keep my credit cards after bankruptcy?
Under some circumstances you may keep your credit cards. There are many factors
which must be considered. Some of those include the credit card balance at the
time of the bankruptcy, what the credit card company is willing to do and
your ability to pay the present and future credit card debt.
Will I lose my job?
No. Bankruptcy laws prohibits discrimination based upon a debtor filing for
protection under the bankruptcy laws.
Can I go to jail if I file bankruptcy?
No. There are no debtor's prisons in the United States.
Will my employer find out about my bankruptcy?
Under normal circumstances, unless your employer is a creditor, your employer
will not know.
Will bankruptcy stop a wage attachment?
Yes.
Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.
Will a bankruptcy remove a lien?
Under some circumstances once the bankruptcy proceedings have started, special
motion can be filed to remove certain liens. It will take a bankruptcy court
order to remove them. This is a complicated area of the bankruptcy law and an
attorney should be consulted.
Will bankruptcy stop an eviction action?
Perhaps. However, this will only delay the inevitable. The owner is entitled to
possession of his property and at best you will be able to remain in the
property until you have received your discharge from bankruptcy or the landlord
obtains an
order from the bankruptcy court. I must caution you that if the only reason you
filed the bankruptcy is to stop an eviction then this might be considered an
abuse of Chapter 7. If the bankruptcy court finds that this is true then the
court can
immediately dismiss the bankruptcy and impose other legal and monetary sanctions
on you.
Will bankruptcy stop a foreclosure?
Yes. However, a home is an asset usually secured by a deed of trust. The
mortgage company is entitled apply to the court for relief from the automatic
stay, the order preventing creditor action by virtue of the bankruptcy.
Depending upon
several factors, you may be able to prolong a foreclosure until you have
received your discharge from bankruptcy. Usually, to keep a home that is in
foreclosure you will have to make a deal with the noteholder.
I am divorced, will bankruptcy wipe-out my obligation to pay community
debts?
In general, you will be discharged from all dischargeable community debts.
However, you should discuss this with your family law attorney to understand the
other implications of the filing of a bankruptcy during the pendency of a
dissolution action (divorce case). Also, remember that if you are discharged
from community debts, your spouse is responsible for the entire balance owing on
the debt. Put another way, they shift the responsibility on to you.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation proceeding. The debtor turns over all non
exempt property to the bankruptcy trustee, who then converts it to cash for
distribution to the creditors. The debtor receives a discharge of all
discharageable
debts.
To file a Chapter 7 bankruptcy:
You must reside or have a domicile, a place of business, or property in the
United States or a municipality. You must not have been granted a Chapter 7
discharge within the last 6
years or completed a Chapter 13 plan. You must not have had a bankruptcy filing
dismissed for cause within the last 180 days. It must not be a "substantial
abuse" of Chapter 7 to grant the debtor relief.
Generally speaking, if after you pay the monthly expenses for necessities there
is not enough money to pay the remaining monthly debts, then granting a
discharge would not be an abuse of Chapter 7. It would not be fundamentally
unfair to grant the debtor relief under Chapter 7.
The most common reasons for consumer bankruptcy are:
Unemployment
Large medical expenses
Seriously over extended credit
Marital problems
Large unexpected expenses
Bankruptcy and Bills
The underlying policy of bankruptcy law is that the honest debtor who is in debt
beyond his/her ability to repay the debt should be given a fresh start through
the discharge of debts in a bankruptcy proceeding.
Not all debts are dischargeable. Generally speaking, the following debts will
not be discharged:
Taxes.
Spousal and Child Support.
Debts arising out of willful or mailicious misconduct.
liability from driving while intoxicated.
debts from a prior bankruptcy.
Student loans.
Criminal fines and penalties.
Those debts which are secured will be discharged, however, expect the creditor
to take the necessary legal steps to take back the property. In most cases if
the debtor's equity interest in the property is exempt, the debtor may retain
the property by redemption or reaffirmation.
About The Bankruptcy Process
When making financial decisions during the process, you should consult your
attorney. In particular there are three items worth mentioning. Under
bankruptcy law, certain luxury purchases over $1000 within 60 days of the
bankruptcy filing are presumed nondischargeable.
Under bankruptcy law, cash advances agregating $1000 within 60 days of the
bankruptcy filing are presumed nondischargeable. Debts involving materially
false financial statements are nondischargeable under certain circumstances.
If you file the bankruptcy yourself, you must fill out the forms. There are
several forms. There could be between 30 and 60 pages in your petition, schedule
and other papers filed at the time of your bankruptcy. You must follow the local
and
federal bankruptcy court rules in completing the forms. Preparing these forms
requires an understanding of both bankruptcy law and local state law in order to
enter the information correctly and accurately. The forms have to be typed and a
certain number of copies must be included with the filing. Today, most attorneys
use a computer system to prepare these forms because of there complexity and
voluminous nature.
About 30 to 40 days after you file the bankruptcy you will have to attend a
hearing presided over by the bankruptcy trustee. This hearing is called the
First Meeting of Creditors. At this hearing the trustee will ask questions under
oath regarding the content of your bankruptcy papers, assets, debts and other
matters. After the trustee is done, your creditors will be permitted to question
you. Do not worry,
your attorney will be there to represent you and your attorney will help you
prepare for the hearing. Sometimes, after your hearing is over, various
creditors will approach you to discuss the status of secured property or the
your desire to retain a credit card. Your attorney will negotiate with them,
with your knowledge and approval.
After this hearing you will normally not need to return to court. However, if a
creditor files a motion or an adversary action, most likely you will have to
return to court. This is the exception and only your attorney can determine if
this is likely
to happen.
Under normal circumstances, the bankruptcy court will automatically issue the
discharge 60 to 75 days after the First Meeting of Creditors.
You can reestablish credit though and be back in "A" credit two years after the
discharge of Bankruptcy. The bankruptcy is a judgment and will be listed for a
period of up to 10 years after the discharge. You must wait 6 years to file
again or if your bankruptcy was dismissed you must usually wait for 180 days to
refile.
Alternatives to Bankruptcy
There is just no easy way to get out of debt, you have to face up to the
consequences. A bankruptcy is not always the answer, as the effects are long
lasting. There are four ways to handle debts that are out of control, listed in
best to worst in regards to the effect it will have on your credit:
If your credit isn't in terrible shape, can you reduce your other expenses, even
if it means making hard choices or just change your lifestyle to fit your
income? Some ways to do this:
1.Selling the second car
2.Pulling equity out of your home
3.Applying for a non-secured signature loan
4.Loan from a relative
5.Selling your home and paying off your debts with the proceeds and then renting
6.Cashing out your 401K/retirement benefits
7.Selling family heirlooms/jewelry/guns
If your credit is already gone or one of the above isn't an option, go through
Consumer Credit Counseling Services (CCCS). Check your yellow pages for the
local number. In this way you're paying off your debts as if you were in a
Chapter 13 BK, but you don't file a BK. If CCCS won't take you, you may want to
consider bankruptcy. Doing a Ch 13 takes longer, but your credit is in a little
better standing than if you do a Ch 7. In the Ch 13 they give you up to 5 years
to pay off your debts. The disadvantage is that you're in BK for up to 5 years
plus your credit report shows your BK for 7 more years after you have finished
paying off your
debts.
If you are so far in debt that you can never repay it, then the best solution
may be a Chapter 7 BK. A Ch 7 is the least desirable credit-wise, but you are
typically out of BK in 6 months and you don't have to repay any debt. The
disadvantage is that this shows on your credit report for 10 years from the date
of filing your BK, and creditors are starting to tighten their credit
requirements, and you may have a tough time getting future financing.
There is no magic solution. Don't believe anyone who tells you otherwise.
Once the bankruptcy is filed, all the property of the debtor at the time of
the filing and certain other property to be received in the future, becomes the
property of the bankruptcy estate. This means that the bankruptcy trustee will
take control of
this property for purposes of satisfying the creditors. HOWEVER, there is
certain property which is either excluded or exempt and the debtor will be able
to keep it.
Property or asset exemption are determined based upon your situation, income and
the laws of your state. The best way to determine which property to keep
requires a detailed analysis of your situation. You need a good lawyer.
As for real property in many states, dependent upon which exemption scheme is
selected and your circumstances, you may exempt up to $100,000 in equity. When
calculating your equity you should use a value that is based upon a forced
liquidation as opposed to the best selling conditions to arrive at a value for
your home. Once you determine this value, subtract the amount owed plus
selling and transfer costs from the value to calculate the equity. As for
personal property, in
California, you are permitted exemptions for a variety of personal property.
This includes, automobiles,household furnishings and personal effects, jewelry,
tools of the trade, retirement plans, unmatured life insurance, personal injury
awards, earnings, animals and some other miscellaneous property. The value of
each exemption and which exemptions can be used are determined by the statutory
exemption scheme is selected. (State laws vary)
How to Avoid Foreclosure
When you miss your mortgage payments, foreclosure may occur. This is the legal
means that your mortgage company can use to repossess (take over) your home.
When this happens, you must move out of your house. If your property is worth
less than the total amount you owe on your mortgage loan, your mortgage company
or HUD could seek a deficiency judgment. If that happens, you not only lose your
home, you also would owe your mortgage company or HUD an additional debt.
Foreclosure or a deficiency judgment could seriously affect your ability to
qualify for credit in the future. So you should avoid it if all possible!
DO NOT IGNORE THE LETTERS FROM YOUR MORTGAGE COMPANY. If you
are having problems making your payments, contact your mortgage company
immediately. Explain your situation. Be prepared to provide them with financial
information, such as your monthly income and expenses. Without this information,
they may not be able to help. Stay in your home for now. You may not qualify for
assistance if you abandon your property.
Some of your options include the following:
Special Forbearance. Your mortgage company may be able to arrange a repayment
plan based on your financial situation. Your mortgage company may even provide
for a temporary reduction or suspension of your payments. You may qualify for
this if you have recently lost your job or your source of income or if you had
an unexpected increase in living
expenses. You must furnish information to your mortgage company to show that you
would be able to meet the requirements of the new payment plan.
Mortgage Modification. You may be able to refinance the debt and/or extend the
term of your mortgage loan. This may help you catch up by reducing the monthly
payments to a more affordable level. You may qualify if you have recovered from
a financial problem but your net income is less than it was before the default
(failure to pay).
Partial Claim. Your mortgage company may be able to work with you to obtain an
interest-free loan from HUD to bring your mortgage current.
You may qualify if:
your loan is at least 4 months delinquent but no more than 12
months delinquent;
your mortgage is not in foreclosure; and
you are able to begin making full mortgage payments.
When your mortgage company files a Partial Claim, HUD will pay your mortgage
company the amount necessary to bring your mortgage current.
You must execute a Promissory Note, and a Lien will be placed on your property
until the Promissory Note is paid in full. The Promissory Note is interest-free
and will be due if you sell or leave your property, or when your mortgage
matures.
Pre-foreclosure sale. This will allow you to sell your property and pay off your
mortgage loan to avoid foreclosure and damage to your credit rating.
You may qualify if: the "as is" appraised value is at least 70% of the amount
you owe and the sales price is 95% of the appraised value; the loan is at least
2 months delinquent prior to the pre- foreclosure sale closing date; and you
are able to sell your house within 3 to 5 months (depending on what your
mortgage company agrees to).
An additional benefit to this option is the assistance you will receive with the
Seller-paid closing costs.
Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily
"give back" your property to the mortgage company. This won't save your house,
but it will help your chances of getting another mortgage loan in the
future. You can qualify if:
you are in default and don't qualify for any of the other options;
your attempts at selling the house before foreclosure were
unsuccessful; and
you don't have another mortgage in default.
A housing counseling agency can help you determine which, if any, of these
options may meet your needs. You should also discuss the situation with your
mortgage company.
One last thing, beware of scams! Solutions that sound too simple or too good to
be true usually are. If you're selling your home without professional guidance,
beware of buyers who try to rush you through the process. Unfortunately, there
are people who may try to take advantage of your financial difficulty. Be
especially alert to the following:
Equity skimming. In this type of scam, a "buyer" approaches you, offering to get
you out of financial trouble by promising to pay off your mortgage or give you a
sum of money when the property is sold. The "buyer" may suggest that you move
out quickly and deed the property to him or her. The "buyer" then collects rent
for a time, does not make any mortgage payments, and allows the mortgage company
to foreclose. Remember that signing over your deed to someone else does not
necessarily relieve you of your obligation on your loan.
Phony counseling agencies. Some groups calling themselves
"counseling agencies" may approach you and offer to perform
certain services for a fee. These could well be services you could do for
yourself, for free, such as negotiating a new payment plan with your mortgage
company, or pursuing a pre-foreclosure sale. If you have any doubt about paying
for such services call HUD-approved housing counseling agency. Do this before
you pay anyone or sign anything.
Here are several precautions that should help you avoid being "taken" by scam
artist:
Don't sign any papers you don't fully understand.
Make sure you get all "promises" in writing.
Beware of any loan assumption where you are not formally released from liability
for your mortgage debt and contracts of sale.
Check with a lawyer or your mortgage company before entering into any deal
involving your home.
If you're selling the house yourself to avoid foreclosure, check to see if there
are any complaints against the prospective buyer. You can contact your state's
Attorney General, the State Real Estate Commission, or the local District
Attorney's Consumer Fraud Unit for this type of information.
