No Point Loans - Are they the Best Choice for your Client?

I'm often asked the question; Tom, my accountant tells me that I should've opted for the lower rate and "bought it down", but I thought the No Points Loan was the Cheapest? Why didn't my other mortgage guy explain this to me?? A great question, isn't it folks! And here's my short, then long explanation for those that want to learn "what makes rates tick" - later in this blog, but first; One of the most important aspects to consider when applying for a residential or commercial mortgage loan is not just getting the lowest interest rate, but also the best overall total loan package (rate, fees, terms of loan). For most homeowners & commercial property owners, this usually means a low fixed or interest only mortgage loan. I do Not recommend any Negative Amortized Loans in our current residential market - when home values are flat or declining. Total Package Costs of the Loan can be tricky to compare what is truly the lowest or best loan for each borrowers specific needs. An experienced and trusted loan advisor can assist in comparing all aspects of each loan program and help determine what's the best fit for you or your client. Case in point - Often times those No Points loan offers you see on T.V. (The Ditech's, etc.) or flooding your inbox and mailboxes are misleading as No Points does Not mean Free or the Lowest Rate - The borrower is effectively eliminating upfront points by paying into a higher interest spread out over the term of the loan. In essence you're "buying Up the Rate" often times by a full 1%. Instead of 5.875% and 1.5 points, you might get 6.625% with no point, but you never get the 5.875% rate And the zero points too. No cake and eat it too here, I'm sorry to say. Ever received a too good to be true, slick direct mailer from XYZ Mortgage? You know the one's that combine the Best of All Loan Programs to look like you get that 5.875% rate with no costs. Yep, it's called "truth in advertising" and folks there's no truth in most of these mailers. They just want their phones to ring, not caring at all how they went about it? My recommendation on a No Points loan is simply this - It should only be considered when the property will not be held long term or more than 2 to 3 years. ************************************************************************ Now, for those of us who really want to know & learn (or brush-up) how it all works, please refresh your coffee or soda and read on. Here's Part deaux Let’s take a look at what makes mortgage interest rates move: Although there are myriad different factors that affect interest rates, the movement of the 10-year Treasury Bond is said to be the best indicator to determine whether Mortgage Interest Rates will rise or fall. But why? Most mortgages are packaged as 30 year products, and the average mortgage is paid off or refinanced within 10 years, the 10-year bond is a great bellwether to measure interest rate change. Treasury obligations are also backed by the “full faith and credit” of the United States Treasury, making them the benchmark for many other bonds as well. 10 yr. Treasury bonds, also known as Intermediate Term Bonds, and long-term mortgages, known as Mortgage-Backed Securities (MBS) also compete for the same investors because they are very similar financial instruments. However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as Payment Defaults and early repayment, and thus carry more risk and must be priced higher to compensate against defaults and foreclosures. So how will I know if mortgage rates are going up or down? Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates. To get an idea of where mortgage rates will be, bond investors typically use a spread of about 170 basis points, or 1.7% above the bond yield to estimate interest rates. So a bond yield of 4.00 plus the 170 basis points would put interest rates around 5.70%. Of course this spread can vary over time, and is really just a quick way to ballpark mortgage interest rates. There have been, and will be periods of time where mortgage rates rise faster than the bond, and vice versa. So just because the 10 year bond rises 20 basis points doesn’t mean mortgage-backed securities will do the same. In fact, MBS could rise 25 basis points, or just 10 points, depending on other market factors. What other factors move interest rates? Factors such as supply come to mind. If loan originations skyrocket in a given period of time, the supply of mortgage-backed securities will rise beyond the demand, and prices will need to drop to become attractive to buyers. Timing is also an issue. Though bond prices may plummet in the morning, and then rise by the afternoon, mortgage rates may remain unchanged. That’s because sometimes the bond movement doesn’t always make it down to the wholesale markets, or simply because it takes more time to do so. Inflation also greatly impacts mortgage rates. If inflation fears are strong, interest rates will rise, but in times when there is little risk of inflation, mortgage interest rates will most likely fall.