Good news and great news - you decide which is which & an interest rate lesson

Mortgage and Lending with Alterra Home Loans

In my opinion, this article from DSNews about home prices being 14-17% undervalued is good news.  If we can find potential clients who have a stable job, decent income and the assets for a down payment and closing costs, we should be better able to convince them that now is a great time to buy a home with them being undervalued as they are.  This tells me that as the job market rebounds, housing prices can rise by about 15% relatively quickly to achieve an equalibrium.  The job market is the key. 

I want to point out something in the article regarding interest rates.  It said that interest rates have climbed from 4.25% to 4.5% but it is important to understand a couple of things about rates.  First, many borrowers, especially first time homebuyers need to minimize their closing costs in order to either have enough money to close the transaction, to maintain some reserves, or to have for new furniture or repairs.  By accepting a little higher interest rate, usually about .25%, the buyer can usually eliminate the origination fee and only increase the payment a relatively small amount.  In most cases, the breakeven point is about five years and five months for those people who actually have a choice between paying the origination fee or going with a higher rate.  The second think that is important to understand is that there is a point in the yield curve where going .125% in rate lower is like stepping off a cliff as far as costs are concerned.  This means that while a rate of 4.5% might be available, it may be very cost prohibitive.  For instance, with a normal yield curve, a buyer can expect to pay one point (1% of the loan amount) to get a benefit of .25% lower in rate OR the buyer can expect to save a point by paying .25% higher in rate.  Depending on the rate, the breakeven point in this scenario for accepting a higher rate is somewhere between 64 -70 months for rates between the mid 4% and upper 5% range.  However, on today's rate sheet, there is a cost of 1.75 points to go from 4.75% to 4.625% (1/8th).  This is where it doesn't make sense.  The bond market is having a bad day so far driving rates higher as all the gains it picked up yesterday have been wiped out because of the extension of the Bush tax cuts and the announcement from China that they will be raising interest rates.  I invite you to leave your thoughts, comments and questions below.

The great news, at least in my estimation, is that the Bush tax cuts have been extended.  With so many people still struggling, paying higher taxes on a decreased income would not have helped the recovery. 

If you want to start off 2011 strong, don't sacrifice your lead generation throughout the month of December.  Make sure you keep this activity as a priority (in addition to blocking out family time and time to write your business plan for 2011 and get prepared to put it into action).  In my 16+ years in the mortgage industry, I have seen so many Realtors have a really slow first quarter and they wonder why - invariably the cause is from not doing lead generation in December; they have used December as down time and then often times that spills over into January. 

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Posted by

D. Jed Wunderli

Certified Mortgage Planner

Alterra Home Loans


Comments (2)

Daniel J. Hansmeier
Rochester, MN

Any rate under 5% is a deal in my book. I remember years back when I refinanced to get locked in at 5% and thought I would never see rates below that. They are going to work their way up again and how long will it be before you see rates below 5% again? Now is the time to buy.

Dec 07, 2010 05:01 AM
Jed Wunderli
Alterra Home Loans - Las Vegas, NV

Daniel - you are absolutely right.  I think anything below 6% is a phenomenal rate from a historic perpsective.  Certainly as rates rise, people who lock in at 5.25% or 5.5% might think about how they could  have had a rate below 5% if they hadn't have waited but their rate will still be fantastic.  Now is a great time to buy if you've got the job / income, assets and credit to make it happen - no sitting on the fence for people who have all three legs.

Dec 07, 2010 05:49 AM