Hi, I am coming up on closing on a new construction home primary residence and looking to get

Asked by Ahmed, Pennsylvania Wed Mar 12, 2008

a 30 year fixed mortgage. Currently my credit score is 803, and looking to put down 40%. I got quotes from lenders with the lowest quotes at 5.75 and 5.875. Planning to close in end of april/beginning of may. When should I lock in the rates, would it be wise to wait until after the fed meets? I'd like to have a lock and unlock option as well, I think lenders should be willing to do it, but not sure if I should lock today or not.

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John Topa, , Scranton, PA
Sat Mar 15, 2008
As a Pennsylvania mortgage broker, I have seen the recent market being extremely volitle. I would advise to lock.

We have a construction program offers a "float down option" that allows you to receive a lower interest rate at the end of construction if rates have gone down. If the rates stayed the same or went up, you are protected by the lock.

The following is a brief explaination about the affect the Fed has on mortgage rates.

When Bernanke and the Fed "change rates", what does this mean. and what impact does this have on mortgage interest rates?
The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give us a call.
1 vote
Waltham Buyer, Home Buyer, 02453
Thu Mar 13, 2008
Hi Ahmed,
I am in almost the exact same position as you and have wondered the same thing. I think you should in general not try to time the market. You should lock the rate because you are planning on buying and the locked rate will help guide you towards a house that you can afford. The rate already takes into account future moves by the fed. The only reason that you are interested in the probability of the rate change and how much is so that you can understand what type of risk you are assuming by waiting to lock. You can use futures to help quantify this understanding. If I were to market time, though, I would guess that the likely upcoming rate drop will cause mortgage rates to increase as it did last time due to fear of inflation.

I would also suggest not putting down more than 20% if you have the tolerance. Mortgage debt is considered good debt due to the tax breaks that you get. Those tax breaks could disappear some day but in the mean time you can take advantage of them. At that interest rate I'm guessing you are looking for a 30-year loan. You can think of a house purchase as an investment in a mortgage-backed bond. You can earn 5.75% on your money by paying down the mortgage faster or you can invest it elsewhere in a well diversified portfolio according to your risk tolerance to earn 6 - 11%. Keep in mind that you can deduct mortgage interest against regular income while your investments will largely be taxed as long term capital gains, making the reward/risk very attractive. Investing the money only makes sense if your time horizon is long and you shouldn't be buying a house if that's not the case. I would say that your time horizon needs to be at least five years and historically speaking ten years actually has lower risk than paying down your mortgage due to inflation. Futures are actually currently predicting that inflation is at least as big of a risk to home values as housing price drops. If you are going to go this route, then be sure to include some international assets in your portfolio to hedge against inflation. Any less than 20% down, though, and the benefits start to disappear (no tax deduction on PMI, higher loan cost, etc).

That being said, I'm not a financial adviser and even if I were I'm not your adviser. The point that I'm trying to make is that before you decide how to purchase your house, you should either do your own research or hire a financial adviser to help you.
1 vote
Corey Grushin, Agent, East Brunswick, NJ
Sun Mar 16, 2008
Dear Ahmed I'm a mortgage banker in New Jersey with my home office in Horsham, PA. Mortgage rates are not based on the Prime Rate, they are based on long term treasury bond yields (2, 5 & 10 yr yields) The prime rate is for short term borrowing.
Also Mortgage interest rates for a 0 point loans have fluctuated between 5.875 to 6.5% during the last 30 days, so any quote older than Friday3/14 is basically obsolete. Also know every lender basically has the same rates (+or - .125%) because they are based off a 'traded commodity", the only difference between lenders is the cost to do the loan. I've seen mortgage brokers quote a rate below market and promise no points. The borrowers get the call from their attorney and they have a bring thousands more tot the closing than anticipated. They look over the closing documents and their are 2 points on the loans that were not discussed or shown. So then depending on the seller you can either close or walk away and be sued.

As for the lock and unlock option known as a 'float down' you think lenders "should be willing to do", this will cost you a point or 1% at time of lock because the bank has to hedge the position they take for you. The up front fee is refundable to you at time of closing, but you could lose it if you don't close with that bank. Now the question do I lock before or after the Fed meets is totally up to you. The market movers have already figured what they want to hear from the Fed and if the majority don't get what they want markets will move, but how will it effect treasuries is what you should be concerned with.
0 votes
George Holev…, Agent, Harrisburg, PA
Thu Mar 13, 2008
If you are dealing with a broker you should lock the rate now, and then if rates go down the broker should be able to switch them to a new lender.
Below is a lender that answer your specific questions:
Velocity Financial Services
Nevin Beyer
531 Bridge Street
New Cumberland PA 17070
(717) 920-0573
(717) 920-0670 fax
(800) 890-7940 toll free
0 votes
Mim Heisey, , Shippensburg, PA
Thu Mar 13, 2008
With the credit #'s and down payment % that you are citing, you are in excellent position. I know that didn't happen overnight, but is the result of disciplined choices over time. Good Job!
The rates that you are being quoted are always in a state of flux and just because the fed drops the prime rate does not mean that the mortgage rate will go down. I know that sounds crazy, but consider! Mortgage rates such as you are considering are already considerably below the PRime.
My advice, based on over 2 decades of real estate marketing experience, is to lock in that rate ASAP. The likely hood that the rate will drop 1/4% or more lower is slim, to say the least. And if you have to pay 'points' (a percentage of the loan amount) for an option to jump on that change, you are betting against the odds.
Again, Congratulations on a good record! Hope that helps

Mim Heisey
Hale Real Estate
0 votes
Brooke 'The…, Agent, Camp Hill, PA
Thu Mar 13, 2008
Ahmed - Great work so far dude!
Concentrate on your fixed, no points rate option and lock into a rate asap! THey are going to change like the wind for a time here BUT don't worry - you should also get at least ONE TIME OPTION to lower your rate during the lock period and you are running out of time for breaking ground on the new build so don't delay! Hope that helps Ahmed!
0 votes
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