When it comes to interest rates, the Federal Reserve is fairly irrelevant. All it does is adjust its rates to those set by the market. If you plot the yield on T-bills against the discount rate, you will see that the former leads the latter. Despite all the rhetoric about it, the Fed has not kept rates artificially low, just as it did not make them soar in the 1970s. The market sets the rates, and the Fed follows. Read the rest of this entry »
I get a lot of excited questions based on information people see on the latest “average interest rate” news. This data is usually published monthly by the media, so it is a regular source of misleading data.
The average interest rate is a compilation of a lot of different interest rate quotes and variables, that do not apply to everyone’s exact situation. The average interest rate is a national average figure, with interest rate quotes from across the country that may not apply locally, and many times also includes interest rate quotes with points. But most consumers do loans with 0 points. Hence, the “average interest rate” you see on TV or in the newspaper always looks artificially low. Read the rest of this entry »
Annual Percentage Rate, or APR, is a legal requirement that mortgage lenders must disclose on one of their disclosures called a “Truth In Lending” statement. It is not a useful way for the consumer to measure the cost of a mortgage.
It is supposed to be a way for lenders to express their closing costs in terms of a percentage. The thinking is that consumers can simply ask lenders for the APR, and can quickly shop by analyzing this one number. But things are not that simple.
APR makes no intuitive sense to most consumers, it does not cover all the costs, and does not take into account differences in a consumers’ time horizons, tax rates and opportunity costs. A more accurate way to measure the cost of a loan is to simply take a more involved look at the interest rate and the closing costs from the lender only. To compare loan offerings between lenders the consumer need not look at title costs, per diem interest, tax escrows or state/county recording and transfer taxes. None of these aforementioned costs is dictated by the lender or is part of the loan itself.
Let’s take an example on a mortgage loan for a property in Washington, DC. Read the rest of this entry »
Are you puzzled why Conventional mortgage rates vary so much, day to day and from bank to bank? Or do you wonder why advertised rates are different when you call a mortgage lender? Many times rates are not all that different, they are just very complicated for a bank or mortgage broker to accurately publish due to numerous variables.
Most people are not aware that Fannie Mae and Freddie Mac have a whole chart of pricing “add-ons”. Add-ons are an amount (expressed in points or rates) that are added on to the “base rate” in certain situations. Some examples of add-ons are for:
condos
investment properties
multi-family properties (a 2 unit, for example)
credit score
extended lock-ins beyond the standard 30-60 days
loan-to-value Read the rest of this entry »
It seems the general consensus is that interest rates are going to drop “because of some Federal program” or, “because the Feds are going to make them go down to boost the economy.” It seems we have more believers in and fans of central planning than I ever imagined. Let’s make one thing clear, interest rates in the long run, are controlled by the marketplace. The Feds cannot decree 3% rates for the next 5 years while we work through this economic mess. Even the Feds ultimately cannot control the marketplace. However, the Feds can impact interest rates in the short run with monetary policy decisions, and the purchase of mortgage backed securities. Ultimately the marketplace sets interest rates after taking into account inflation and deflation, government monetary policy, supply of and demand for funds, and future economic expectations.
It has also recently been discussed that the cost of funds is much higher for lenders, and the availability of credit to then turn around and extend to the public is diminishing. Hence, it is said that it is hard for banks to drop rates, regardless of what the Feds do, in light of less available and more costly sources of funds. Read the rest of this entry »