Does the Fed set mortgage rates? In a word, no. Who then is responsible for setting mortgage rates? The truth is that mortgage interest rates are set by market forces, so the real question lies in looking at which factors most influence mortgage interest rates.

The Fed Funds Rate

First, let’s take a look at the Federal Reserve and how its policies affect mortgage rates. One of the responsibilities of the Federal Reserve is to set what is commonly called the Federal Funds Rate. This is the rate often referred to when people talk about the Fed cutting or raising “rates.” In reality, the Federal Reserve does not cut or lower “rates.” Instead, the Federal Reserve determines the Federal Funds Target Rate. This is the rate that banks charge when they lend money to other banks, usually overnight. Banks are required to meet reserve requirements, typically 10%. That means they must keep 10% of their funds on deposit with one of the Federal Reserve banks or as cash in their vault. If at the end of the day a particular bank has only 9.75% in reserves, that bank must borrow money to bring their reserve balance up to 10%. The quickest way to get that money is to borrow it from a fellow bank that has excess reserves. In short, the Fed Funds Rate is the rate that a particular bank will pay to borrow money from another bank for an overnight loan. A bank that consistently fails to meet reserve requirements will be shut down, so banks must borrow money to meet reserve requirements if their reserves are insufficient.

The Fed Funds Rate affects short term loans (usually overnight) between banks. As such, it does not have a direct affect on mortgage interest rates, which are long term financial instruments. Using common sense, the rate a bank pays to borrow money for one night will not directly affect the interest rate charged on a 30 year home loan. The Fed Funds rate is truly the shortest of short term interest rates. On the other end of the financial spectrum is the 30-year fixed rate mortgage, the longest of long term financial instruments. It’s easy to see why the two are not directly related. However, the Fed Funds Rate does have an affect on interest rates in general because it directly affects the prime rate, which is the base rate that banks charge when lending money. As you can imagine, if the banks pay more to borrow money, in turn, the banks are going to increase the interest rate they charge to customers. As such, the prime rate is tied to the Fed Funds Rate.

Even though the Fed Funds Rate does not affect mortgage interest rates directly, there is an indirect relationship. The Fed Funds Rate affects interest rates which, in turn, affect the financial markets. Anything that affects the financial markets is going to affect mortgage rates, so indirectly speaking, the Fed Funds Rate does have an effect on mortgage interest rates. When the Fed Funds Rate has been at historic lows, so have mortgage interest rates, for example. However, if the Fed drops the Fed Funds Rate, do not expect mortgage interest rates to drop because the two are not directly related.

Mortgage Backed Securities

Many people do not realize that mortgages are often sold almost as soon as they are originated. Here is how it works. You take out a mortgage with a well known home lender. That lender might retain the servicing on the loan (meaning they will still send you statements and answer your telephone calls), but they will often sell the mortgage itself. What they do is pool a group of mortgages and sell them to Wall Street. The people on Wall Street then sell those financial products (now labeled “mortgaged backed securities”) to investors. The people looking to buy mortgage backed securities are often pension funds, insurance companies and other institutional investors. Think of mortgages as the supply and the investors as the demand. Because the performance of the mortgage backed securities market represents demand, there is a direct relationship between the mortgage backed securities market and mortgage interest rates.

The 10-year Treasury

A 10-year Treasury Bond is an interest-bearing note issued by the United States Treasury. If you own a T-bill, the government owes you money. Because the Treasury bonds are backed by the “full faith and credit” of the United States, they are seen as low risk, making them a benchmark for other investments. Because mortgages rarely last longer than 10 years before being paid off, they are often compared to 10 year T-bills for investment purposes. While there is no specific or official relationship between the two, there is an unofficial trend between mortgages and t-bills. Here is how it works. Investors look at their options. Treasuries are 100% guaranteed to be repaid because the government can either raise taxes or print more money when the t-bill matures. Mortgage backed securities, however, are not a guaranteed investment. Some of the mortgages could default, for example, directly affecting the value of the mortgage backed security. Because the mortgage backed securities carry more risk, they do, of course, provide for a higher rate of return. To compensate for the added risk, mortgage rates must be priced higher than treasuries. The “spread” between mortgage rates and treasury rates widens and contracts based on investor appetite. The “spread” is an approximation of how much risk the market thinks there is. Essentially, mortgage bonds and t-bills compete for the same investment dollar, so there is a relationship between the two, although the relationship isn’t a fixed one.

In the end analysis, there are many factors that influence mortgage interest rates including supply, demand, inflation, and the economy in general. If the Fed Funds Rate is lowered tomorrow, it will have no more direct affect on mortgage interest rates than it will on the price of orange juice. However, the mortgage backed securities and treasuries markets are closely related to mortgage interest rates.

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An 80 20 mortgage is also called a zero down loan or no money down loan. It is actually two loans, a regular home mortgage which constitutes 80% of the price of the home and a second mortgage or home equity loan that consists of 20% of the cost of the house. The idea behind this type of loan is avoiding mortgage insurance (PMI) by using the home equity loan as the down payment.

Just about all mortgages require some form of mortgage insurance if you are unable to make a down payment of at least 20 percent. By obtaining a second mortgage or home equity loan for 20 percent of the homes cost you can circumnavigate this requirement by using that second loan as the down payment.

There are variations of this type of mortgage such as an 80-15-5 loan. This means that the borrower got a main mortgage of 80 percent of a home’s purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. This can be a good option if you have some money for a down payment but not enough to cover the entire 20%.

The second mortgage can either be a fixed second mortgage or it can be a line of credit. If it is a fixed second mortgage then the interest rate is normally fixed for the entire length of the mortgage. Most fixed second mortgages are a 30 due in 15 which means that the second mortgage is amortized over 30 years, but is due in 15 years. The benefit of going with the line of credit as the second mortgage is that the interest rate is normally much lower than the fixed second mortgages rate. They can also be an interest only loan which could save you hundreds of dollars in mortgage payments every month.

The 80 percent first mortgage can be a fixed-rate (15-year or 30-year), adjustable-rate (usually 5/1, 7/1 or 10/1fixed period ARM) or interest-only loan. Typically, the interest rate on the second mortgage loan is higher than the interest rate of the first loan. But because the borrower doesn’t have to pay mortgage insurance, the overall cost is less than a traditional mortgage even with the higher mortgage interest rate on the second loan.

Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Getting an 80 20 mortgage can be a good way to avoid the extra cost that PMI will add to your monthly payments.

If You Need Help, You are not alone

If you are struggling to pay your mortgage you are not alone. Authorities project that over 2 million homes will go into default this year. One out of every 18 homeowners is behind on their mortgage payments. That’s bad news.

Help Is Available

The good news is that many real estate professionals as well as the government and lending and banking institutions, are very interested in helping you save your home. On the average, a home foreclosure reduces the surrounding property values by $17 to $18 thousand dollars – within a five mile radius of the property. Every home saved means fewer vacant homes, which supports higher property values, a stronger community, and an improved local economy.

Real Estate and Financial Professionals Can Help

Many Real estate and financial professionals realize that some in their communities are going through difficult times and it is affecting their ability to make their mortgage payments, avoid foreclosure and save their homes. Saved homes mean stronger communities that have a greater need for their services.

The US Government Wants To Help

The housing market is an important sector of the economy and the government wants reduced foreclosure rates and increased property values to strengthen the economy. The government has helped by coming up with new loan programs that make it a little easier for homeowners to refinance into a loan with better interest rates, which translates to lower mortgage payments. However, not all mortgage brokers keep track of these programs. It’s important to work with a broker who specializes in this area because he or she can stay up to date on these new developments.

The Banking and Lending Institutions Can Help

The banking institutions are often willing to negotiate with homeowners who are behind on their payments, or whose interest rates are adjusting to the extent that they won’t be able to make their payments any longer. The banks would often prefer to have a paying homeowner on modified terms, rather than end up with a vacant house on their books which they have to pay to fix up and sell.

Use A Team Of Experts For Best Results

You can of course talk to your lender and try to make an arrangement on your own. However, there are professionals who have become expert at these types of negotiations and know exactly how best to present your case to your lender to get you the best possible terms of loan reinstatement or interest rate reduction. The end result of a successful negotiation can be a lower mortgage rate but there is no guarantee. Timing and strategy are important. This is where having a professional in this area is the key.

By the same token, you could try to find out about all the latest loan programs and decide which one is best for you, but working with the right mortgage broker will keep you from having to ‘reinvent the wheel’, as the saying goes.

Seniors Have A Special Advantage

Seniors are a special case. If you are a senior, it may be possible to eliminate your mortgage payments altogether with a mortgage product that actually pays you every month, instead of you paying a mortgage. It’s called a reverse-mortgage. It’s not for everyone, but it may be exactly what you need to be comfortable during your retirement years. Even if you have applied for a reverse mortgage in the past and been denied, there are some new loan products evolving that may be even better suited to your situation.

Action Plan To Reduce Your Mortgage and Save Your Home

Now is the time to empower yourself by taking constructive action.
If you are a homeowner who is saying “I need to lower my mortgage payments or I will not be able to avoid house foreclosure.” Here’s what I would suggest you do next. Take the 8 Steps below that spell:
M-O-R-T-G-A-G-E

M – MOVE IT!: – Make sure you take action as soon as possible. The quicker you act, the more choices you have

O – ORGANIZE YOU DOCUMENTS: Have you been letting those scary letters pile up in the corner? Make sure you have organized all related files and paperwork so you can get your hands on what you need, quickly. This also increases your sense of control over your situation.

R – RECRUIT YOUR TEAM: Look for an experienced team of real estate and financial professionals that is working together in your best interest. Start by asking to your friends and family for recommendations and searching offline as well as online. Remember that in the financial world you are not limited geographically. Your best team members may be hundreds of miles away. Keep searching until you are certain you have the right group. Good advisors often work together. Sometimes the key is to find one team member that you know is the right fit for you and he or she can lead you to others.

T – TAKE ADVANTAGE OF ALL RESOURCES: Keep an open mind. Work with your team to explore all of your options for yourself and your family. The solution may or may not be straightforward. Make sure you clearly communicate the issues that are most important to you. Brainstorm. Ask questions. You will often find that the best strategy will present and confirm itself as you keep cycling through this process.

G – GAIN FAMILY CONSENSUS: Discuss options with all concerned and affected by your decision. (well maybe not the dog, but everyone else). Talking it through will help to eliminate some of the stress and provide needed support when everyone is on the same page. It’s amazing how much more you can accomplish when you have full cooperation of the most important people in your life.

A – ACT: Take a deep breath, take action and make your best choice. Don’t give in to analysis paralysis. At a certain point, you have to pull the trigger and make a decision.

G – GIVE YOURSELF A BREAK: Go easy on yourself, knowing you have done your best for yourself and your family. Guilt, anger, and frustration only sap your creative problem solving energy.

E- EXPECT TO SHARE YOUR KNOWLEDGE: When you are ready, pass on the knowledge you have gained to others worthy of your wisdom. Remember when you were at the team recruitment stage and were asking around for recommendations? Now it’s your turn to ‘pay if forward’ and share your experience so it benefits others. Word of mouth travels. You may be the reason someone else can save their home by lowering their mortgage payments!

So there you have it. If you get:

Moving,
Organize all of your documents,
Recruit your dream team,
Take advantage of their wisdom,
Gain your family’s consensus and support, take
Action,
Give your self a serious break, and
Expect to share your knowledge with someone else who needs help,…

You will be amazed at how smoothly you can come up with a workable solution… with a little help from your friends!

I hope you have gained some useful knowledge. May you and your loved ones have all the best for your future!

Mortgage is a long term loan and the mortgage monthly payments form a major monthly expense. A lower mortgage rate means lower monthly mortgage payments. This is one reason why people hunt for low interest rates on a mortgage.

As we know, there are two types of mortgage rates i.e. fixed and floating, and different people prefer different types of rate. Again, the prevailing market rate keeps changing all the time. So it’s quite possible that you entered a mortgage at a rate that is higher than the current rate. This is when you start thinking of mortgage refinancing. By mortgage refinancing we mean full payment of the current mortgage loan by entering into a new mortgage loan at a lower rate. So mortgage refinancing starts making sense as soon as the difference in the mortgage rates becomes significant (say 1.50-2% points) i.e. prevailing market rate comes down significantly as compared to the mortgage rate on your current mortgage.

Mortgage refinancing decision would, of course, also depend on the remaining term of your mortgage (for mortgage refinancing would make no sense if you had just a short period of say 4-5 years remaining on your current mortgage). These criteria for mortgage refinancing are based on the various costs associated with mortgage refinancing. These mortgage refinancing costs include prepayment costs for the current mortgage, closing costs of the new mortgage and other fees etc. Generally, people use mortgage refinancing as a tool to move from a higher adjustable rate mortgage to a lower fixed rate mortgage. Though the reverse is possible too in some cases but adjustable rate mortgage to fixed rate mortgage is generally the case.

Another reason for mortgage refinancing is ‘need for money’. So, if you have built a significant home equity, you can use mortgage refinancing to get a home mortgage loan that will generate cash for you (by bartering your home equity). This money generated from mortgage refinance can be used for various purposes like financing the education of children, debt consolidation or home renovation. Debt consolidation is one big reason for mortgage refinancing. You can use mortgage refinance for creating money to get rid of high interest debts (like credit card debt, personal loans etc) and hence save money and your credit rating too.

By mortgage refinancing you can save thousands of dollars in terms of the total interest you pay over the term of loan. So mortgage refinancing is surely a good option but must be exercised only after proper evaluation of the situation and of your own needs.

Mortgage net branch companies are also called mortgage net branch originators. These are the companies – huge enterprising conglomerates – that wish to spread their mortgage business all over the nation, or maybe all over the world. These are the companies that invite franchises, better known as mortgage net branches, from all over in order to conquer hitherto untapped territory. Originators gain by getting more business and goodwill; net branches gain by getting their brokerages and security of business.

Though mortgage companies wish to have as many net branch companies in as many parts of the nation as possible, they do not blindly select their branches. There are certain judging parameters. Of chief importance is whether the applying branch has its own license in the state where it is going to operate. Besides this, there are requisites like two or three years of experience, communication skills and even a written examination. Net branch companies make their prospective net branch applicants fill application forms and pay an amount to partake of their brand name and goodwill. Mortgage companies are obliged to take net branches according to the guidelines of the Housing and Urban Development (HUD) code.

Most mortgage net branch companies have branches all over the nation. Some of them even have more than one branch per state. Their main aim is to infiltrate each potential mortgage market within the country. Even after choosing their net branches with care, mortgage originators provide training and orientation according to their own policies, along with machinery to process and write loans.

The payment to the net branch is done on a commission basis. Usually, if the net branch is operating from an office, then the remuneration is normally split on a 90-10 basis. That is, the net branch gets to keep 90% of the commission, while the company keeps 10% along with a small sum to cover the procedural charges. But if the net branch is working from home, then the mortgage company may keep a larger amount of the payment.

The mortgage company is fully responsible for the activities of its net branches. Any volition by a net branch may lead to the termination of the license of not only that particular net branch, but also all other net branches of the company, and in dire situations, of the parent company itself. Hence, mortgage companies have to select their net branches with extreme care, having a background check done and checking references.

Locking in your mortgage interest rate is how loan originators guarantee an interest rate. The purpose of the lock is to allow you time to close on the loan at the interest rate you agreed. If you are unable to close before the rate lock expires, the mortgage lender could charge you a higher interest rate for the loan. Here are the basics of mortgage rate locks to protect you when refinancing your mortgage loan.

Wholesales mortgage lenders use a rate sheet listing the current day’s published mortgage interest rate. The day your rate is locked it can only be based on the current day’s interest rate. You can only lock your interest rate from the time this rate sheet is issued each morning until the close of business, which is typically 4pm in the lender’s time zone. The duration of the lock will be specified in your loan documents and must allow you enough time to close on your new mortgage. If your lock expires prior to this you will pay dearly for not closing in time.

Before you agree to a lock period, find out what the loan originator’s time frame is for completing your loan. If it will take 15-20 days to complete, a 30 day interest rate lock will be sufficient. This timeframe assumes there will not be complications when the lender is completing your loan. Locking in the right interest rate is crucial when refinancing your mortgage. The discussions you have with the lender are meaningless until you have that interest rate guaranteed in writing. Interest rates change on a daily basis and that 5% loan interest rate you discussed could easily turn into a 6% mortgage in as little as 72 hours.

Trusting your mortgage representative to do the right thing with your interest rate is a big mistake. Your mortgage originator is only concerned with padding the interest rate with as many points as possible to collect a bonus for Yield Spread Premium or YSP. YSP basically means the more you pay, the more the originator receives as a bonus. This is the bait and switch you hear about with mortgage loans. The longer the mortgage lender can put off guaranteeing you interest rate, the more they can raise it when you are one week away from closing. Would you really forego the closing over a .25% increase in your interest rate? Did you know this .25% means an additional bonus for your mortgage originator of 1% of your loan amount? This is a lot of money changing hands just for overcharging you on your new mortgage loan.

Most homeowners don’t know what the lender is doing; they don’t recognize delay tactics and blindly agree to pay .25% to .50% or more while their loan originator takes advantage of them. If you don’t want to be taken advantage of when refinancing your mortgage loan, register for a free mortgage guidebook.