You have probably heard the recent news about mortgage lenders going bankrupt, hedge funds evaporating and the uncertainty in stock market. What does it all mean for you and me? There is no denying that the financial markets are on edge and volatile, and some financial companies are in difficult positions, triggered in large part by rising foreclosures in the subprime market and the effect on investments tied to those loans. But the degree to which the current situation affects each of us depends a lot on what you have planned in coming months. If you would like to tap into the mortgage market -- buy a house, refinance your mortgage, take a home equity line of credit -- the recent turmoil will directly affect what kind of loan you can get and how much it will cost.
The investors who buy loans in the secondary market drive the market in terms of availability of products and costs to consumers. The investors who buy mortgage-backed securities are eyeing rising foreclosure rates among subprime and even some "good credit" mortgage borrowers and responding by refusing to buy loans. That, in turn, means lenders are tightening up their underwriting standards. Only those borrowers who fit certain criteria are likely to find the exact loans they want. In the end, securities investors are now pricing for risk to a greater extent than they have done in recent years and they are also factoring for greater risk in the larger, or "jumbo," loan area.
For homebuyers, gone are the days of getting a mortgage with just a 5% (or less) down payment and no proof of income. And if you have great credit, but live in an area where home prices average more than $417,000 (the jumbo note rate), you will pay a higher mortgage rate right now, even as those who borrow smaller loan amounts are enjoying mortgage-rate declines. Recently, the average rate on a 30-year fixed-rate conforming loan (less than $417,000) dropped to 6.66% while the average rate on jumbo loans rose to 7.35%. For most borrowers it is now more difficult to get a loan. You need a better credit score and more equity as lenders are demanding strong proof of income and employment. In addition, getting a home equity line or loan is going to be harder and more expensive. If you were hoping to max out your home equity with a second mortgage, your lender might be a little more leery of a high loan-to-value ratio.
While some homeowners who can afford their mortgage payment can simply sit this turmoil out, those eager to buy a home or tap home equity may need to jump right into it. Prospective home buyers who will need a jumbo loan may want to sit on the sidelines in hopes that rates ease back a bit. On the other hand, homeowners need to ensure they understand the terms of their mortgage loan. Don't get blindsided by a big payment increase. Some good credit borrowers are still in the position that they can refinance at attractive fixed rates and avoid the type of huge payment increase that's impacted so many subprime homeowners.
These days, all eyes are on the Federal Reserve and whether or not they will continue to cut rates. Some experts suggest that even if the Fed does continue to act, there may be little change in mortgage rates. The reason? Typically mortgage rates follow the interest rates that the government pays for 10-year Treasuries. But in the last few weeks, 10-year Treasury yields have fallen substantially, while mortgage rates have remained stuck around the six percent range. Those rates are not budging because bankers are still uncertain about the mortgage market and they are requiring borrowers to pay a premium. Right now it is not just about what the Fed does, it's more about how the market reacts.
Ultimately you will have to evaluate your situation. If you are in a longer adjustable rate mortgage, like a 7-year or a 10-year ARM, decide how long you want to stay in the house and figure out how much time you have before your rate adjusts. If you have less than one year left, it is probably time to refinance. The process of refinancing takes at least 30 - 60 days. If you have two years left and good mortgage terms, it may be worth your while to wait. If you are facing a rate adjustment and housing prices have fallen a bit, you may want to refinance sooner rather than later. That's because prices could fall even further. As always, you should speak with a reliable professional and become educated with the ever changing housing and mortgage markets.
Questions or comments about this article? Contact the author - Mathew Roth