Most mortgage watchers are keenly aware that 30-year mortgage rates are once again sinking, and are now hovering around around 5%. However, few are aware that 15-year rates have been falling even faster. According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 15-year mortgage rate is only 4.46%, just above the record low 4.33% recorded in early October. Only 6 months ago, the spread between 15-year and 30-year rates was .3%. Now it’s .6%. Over that time period, 30-year rates have risen, while 15-year rates have fallen. Unsurprisingly,demand for 15-year mortgages is now outpacing demand for the 30-year alternative.

While it’s impossible to offer a comprehensive explanation for this divergence, most analysts attribute it to the fact that the different mortgages are being utilized by different types of borrowers. “The main users of 15-year loans…are established homeowners refinancing mortgages — people secure enough that they often take on larger monthly payments in order to pay off their loans before they retire…People who take out 30-year loans, by contrast, are generally less well established, with smaller down payments, and require a bigger slice of their incomes to make their payments.” Given the current economic climate, then, it makes sense that lenders are willing to offer a discount to those with an established credit history (i.e. 15-year borrowers), compared to those entering the market for the first time (i.e. 30-year borrowers).

As for those of you trying to decide which duration is most appropriate for you, well, that’s not an easy question to answer. In a nutshell, a 15-year mortgage will save you a tremendous amount of interest (more than half) over the life of the mortgage, but this is offset by a much higher monthly payment. There is also a psychological benefit of being able to pay off the mortgage sooner and not have to worry about spending the rest of one’s life making payments. Summarizes a Freddie Mac rep: “The thinking is that many baby boom mortgagors are taking advantage of the low rates to refi into a mortgage that will enable them to live a relatively care-free retirement life — i.e. free and clear of mortgage debt.”

But with any dilemma, the reality is much more nuanced. For one thing, the monthly payment associated with a 15-year mortgage is significantly higher. Accordingly, one might opt for a 30-year mortgage and simply repay it in accordance with a 15-year amortization schedule. In this way, one retains the flexibility to make the lower (30-year) payment if financial hardship strikes. This “insurance” is inexpensive relative to the overall mortgage, adding $50 a month for a $200,000 mortgage. Skeptics counter that few borrowers are disciplined enough to make the 15-year payment voluntarily and that for those facing financial hardship, making a 30-year mortgage payment will probably be just as problematic as a 15-year payment.

Other proponents of 30-year mortgages point to the extra interest as an advantage, since it is tax-deductible. One clever analyst thought he had figured out a way to save money overall with a 30-year mortgage by exploiting this loophole, but it turns out that the spread between 15-year and 30-year rates has widened to such an extent that “the math no longer works.” Once again, the skeptics rightfully point out that even if you can deduct 30% (assuming a relatively high tax bracket) of your mortgage interest, that still leaves 70% that you are paying to the lender.

Finally, there is also the possibility that interest rates will skyrocket, creating a possible arbitrage opportunity with a 30-year mortgage that wouldn’t exist with a 15-year mortgage. Basically, if you invest the funds that would otherwise have been paid to the lender in a high-yield savings account, you would end up with more money than you would otherwise have had if you simply opted for the 15-year mortgage. But these opportunities are pretty rare, and anyone who argues to the contrary is probably trying to cover up the risk associated with such a strategy.

In short, it’s reasonable to assume that a 15-year mortgage will save you money, compared to a 30-year mortgage. However, the higher monthly payment is an important consideration, and should not be accepted by those with uncertain financial situations. If, on the other hand, your income stream is relatively stable, and you’re eager to escape from under the burden of debt as quickly as possible, the 15-year mortgage is a reasonable choice.

If used properly, mortgage assumption can provide valuable benefits for both the buyer and the seller. If used improperly, however, they can be a bane for both parties, as well as illegal.

Let’s start with the basics: What is meant by the term “assumed mortgage?” In a nutshell, the assumption of a mortgage is just what it sounds like- the transfer of all liabilities associated with a mortgage from one party to another. There are several variations, but it basically refers to a situation in which the buyer of a home assumes the existing mortgage from the seller, in lieu of taking out a new mortgage.

The benefit of such an arrangement is cost savings. Especially if interest rates have risen in the interim (i.e. in the time that has elapsed since the mortgage was initially obtained), the savings can be significant. Even with significant changes in interest rates, there are savings associated with not having to pay closing costs associated with obtaining a new mortgage. A buyer whose credit is less than stellar meanwhile, can avoid negotiating with a bank, and instead negotiate directly with the seller. Typically, any savings are shared between the buyer in the seller, and are simply tacked on to the price of the home.

Historically, mortgage assumption was only ever popular during times of interest rate uncertainty, namely the 1980’s and early 1990’s. At that time, many mortgages were assumed privately. In other words, the transfer was negotiated directly between buyer and seller, without the knowledge of the lender. Such mortgages are often structured as wraparounds, whereby the original mortgage is maintained by the original borrower, who receives payment from a new homeowner at a spread to the original borrower. Nowadays, such assumptions have become the exception, since lenders have caught on and inserted due-on-sale clauses into mortgages, which essentially required them to be repaid in the event of a change of ownership on the underlying property. Failure to notify the lender of a mortgage assumption, in such a case, qualifies as mortgage fraud.

Some lenders have become more amenable to mortgage assumption, such that they are willing to honor a transfer to a new borrower without assessing fresh closing costs. The catch is that in the process, the interest rate is ratcheted up to conform with prevailing rates. [Otherwise, the lender would deprive itself of the income that it could earn from charging a higher rate]. It should be noted that FHA and VA loans are always assumable, although those originated after 1989 require the approval (and payment of certain fees) of the lender.

If private mortgage assumption strikes you as incredibly risky, that’s because it is! While a public (i.e. lender-approved) assumption relieves the original borrower of all liability, private mortgages are off-the-record (and often illegal) and hence must be resolves directly between the two parties involved. Failure by the new borrower to make timely payments would place the original mortgager in the awkward position of playing landlord, perhaps to the point of executing a form of foreclosure. Meanwhile, mortgages that are assumed multiple times still leave the borrower (and his credit rating) on the hook until for as long as the mortgage remains existence, as one borrower learned the hard way.

In today’s ultra-strict lending environment, chances are you won’t ever have to deal with mortgage assumption. Given that rates are projected to begin rising, however, it could conceivably experience a modest surge in popularity. Still, for the average borrower, it’s not something worth considering.

The trend of mortgage rates over the last couple months has generally been down, or at worst flat. That could be about to change, however, as rates ticked up for the first time since August, averaging 5% on the dot. According to an alternative survey conducted by the Mortgage Bankers Association (MBA), the rate for the benchmark 30-year fixed-rate mortgage surpassed 5% two weeks ago and is in fact now closer to 5.1%

Meanwhile, the average rate on a 15-year fixed-rate mortgage rose to 4.43 percent, from 4.37 percent last week, according to Freddie Mac. Rates on five-year, adjustable-rate mortgages averaged 4.4 percent, up from 4.38 percent a week earlier. Rates on one-year, adjustable-rate mortgages inched down to 4.54 percent from 4.6 percent. Points across all four categories of mortgages have remained constant at around .6.

Regardless of which survey you prefer, they all indicate that rates are rising. The consensus among analysts and industry insiders, meanwhile, is that they will continue to rise. “At a congressional hearing on Tuesday, MBA Chief Economist Jay Brinkmann said that the ‘most benign estimates are for increases in the range of 20 to 30 basis points’ but that some estimates of potential increases ‘are several times those amounts.’ ” The main reason for the projected increase has nothing to do with changes in the balance between the supply and demand for mortgages. Rather, it is grounded in the expectation that the Fed is planning to turn off the spigot of cash that has already spewed more than $1 Trillion into the market.

Typically, an inverse relationship exists between mortgage rates and home prices, such that when rates rise, prices fall. This is primarily due to the fact that borrowers work backwards when buying a home by first determining the highest monthly payment they can afford. With higher rates, the interest portion of the payment rises at the expense of the equity payment, which translates into a decline in the price of a home one can afford.

It is not clear whether that relationship will hold this time around, if/when mortgage rates finally rise. Home prices have actually ticked up over the last two quarters, and it’s possible that this momentum will be sustained. Unfortunately, this is not the view espoused by the majority of analysts. Robert Shiller, of the eponymous Case-Shiller Index, has discerned through a recent survey that a bubble-mentality has gripped many of the buyers wading back into the market. Anecdotal evidence also suggests that speculators have returned to the markets, en masse.

First-time buyers make up the other large contingent. When the tax rebate underlying such sales expires this month, chances are that this class of buyers will disappear completely. Even if Congress extends the deadline of the program, it’s likely that it won’t have much of an effect, since most of the determined buyers have already entered the market. Investors have already come to understand this notion, which explains why housing stocks are down nearly 20% from the summer highs.

“I’m a firm prophet of the ‘W’ shaped recovery. Housing is going to go down again in the first quarter of 2010. The real healing won’t begin until all these nonperforming loans start trading in earnest, until we get these borrowers back on their feet,” expounded one analyst. In other words, housing prices can’t recover until the economy recovers. Put another way, the housing market won’t return to normalcy until the financial situations of long-term, non-speculative borrowers have likewise returned to normal.

Determining the size of one’s down-payment is more complicated than it would seem. Historically, the prevailing wisdom regarding down-payments was the larger the better. During the inflating of the housing bubble, however, this logic was turned on its head, and it was even possible to take out a no-money down mortgage. As it turns out, there are advantages and disadvantages to both approaches.

Personal finance columnists usually advise a down-payment of 20% Loan-to-Value (LTV). In other words, take the size of your mortgage, multiple it by 20%, and VOILA, you have your down-payment. According to their reasoning, 20% is substantial enough both to demonstrate your creditworthiness to the lender and to cushion you from negative price swings in the value of your home.

Given the decline in housing prices, however, it’s perfectly conceivable that borrowers that made 20% down-payments are still underwater in their mortgages. After a foreclosure, then, such borrowers will be left with stains on their respective credit report, and gaping holes in their personal assets. From the lender’s perspective, meanwhile, such borrowers are actually considered less credit-worthy than those that make the minimum required down-payment. For those of you scratching your heads: It turns out that those who make down-payments between 20-25% are actually more likely to default. In addition, such borrowers aren’t required to purchase private mortgage insurance, further increasing the cost of default to the lender.

The cost of private insurance, then, can actually be recouped in the form of lower interest rates! In other words, there isn’t much of a financial penalty (sometimes even a reward!) for making a smaller down-payment. Some financial planners now encourage making the smallest allowable down-payment, based on the reasoning that borrowers can then set aside extra money in an emergency fund, making it less likely that they will become delinquent (miss payments) on their mortgage further down the road.

What is the minimum down-payment? Well, that depends on the loan, and the lender. A Federal Housing Administration (FHA) loan requires a 3.5% down-payment. [However, proposed legislation would increase this to 5%]. For veterans, or those that live in rural areas, there are VA home loans and Guaranteed Rural Development loans, respectively.

For those not eligible for the loans above, it might be worth looking into a down-payment assistance program. Some of these programs are also government sponsored, and/or provide low-interest loans to be used exclusively for making a down-payment. There are also several not-for-profit companies which offer down-payment assistance, typically by rolling the down-payment into the overall loan amount, but such organizations have come under scrutiny in the wake of the collapse of the housing market. For first time home-buyers, the $8,000 tax credit can now be “monetized” and applied towards the down-payment. [Under earlier rules, the credit was received in the form of a tax credit, and hence, could not used for a down-payment.]

For those still struggling to scrape together the cash, there are a few more options available to you. First, you can talk to your lender and try to pledge securities in lieu of making a down-payment, but be advised that such is tantamount to borrowing money to buy stock. Second, if you already own the land that your home is (being) built on, that may qualify as a down-payment. Third, you can appeal to family/friends for help, but be aware that the lender will demand proof that any such assistance is a gift, rather than a loan. Finally, you might try talking to the seller, and asking him to help you make your down payment (offset in the form of a higher sale price). This will only be possible, however, if the sale price initially exceeded the appraised value.

All else being equal, a larger down-payment should translate into smaller monthly payments, as a result of both lower principal and interest. It should also lower your mortgage insurance premiums. As I noted above, however, some lenders actually penalize those who make larger down-payments. Ultimately, every situation is different, and it probably makes sense to use a mortgage calculator to crunch the numbers associated with a few different scenarios to see ultimately which one makes the most (financial) sense for you.

Over the summer, the Government Accountability Office (GAO) released a report on the IRS handling of the Home Mortgage Interest Deduction. Despite being published with little fanfare, the report was widely circulated and could lead to big changes to the tax treatment of mortgages.

As almost everyone who takes out a mortgage is certainly aware, mortgage interest payments are tax deductible, which means the actual interest rate paid by the borrower is often significantly lower than the rate quoted by the bank. [The precise discount depends on one's tax bracket]. However, the understanding of most borrowers doesn’t extend much beyond this, which is problematic because it turns out mortgage-related tax matters are actually quite complicated.

For example, the tax benefit can only be claimed on mortgages under $1 million, and cannot generally be increased as a result of a refinancing, unless the proceeds are used to improve one’s home. Points, which are used to buy down the interest rate when the mortgage is first issued, are deductible in the year they are paid, as are loan origination fees. Lender fees, private mortgage insurance, and other settlement costs cannot be deducted.

As for home equity loans, the limit is $100,000. Paradoxically, the proceeds from a home equity loan cannot be used in relation to the home in order to be eligible for the deduction, but can be used for almost anything else, from credit card payments to school tuition, etc. If the borrower is subject to the Alternative Minimum Tax (AMT), however, the opposite applies, and the proceeds MUST be used towards the improvement of the home in order for the interest to be tax deductible. Confused yet? If so, the chart below represents the best summary of the IRS rules I have ever come across and should be a great reference when it comes time to file your taxes!

The IRS doesn’t make things easier. According to the GAO assessment, taxpayers have to go through as many as 13 steps to determine first whether mortgage interest is tax deductible, second whether points are deductible, and third the size of any deduction. Included in the official tax forms is a handy flow chart, which borrowers can theoretically use to complete these steps. However, the increasing majority of taxpayers that use tax preparation software to file probably doesn’t ever see this chart. To make matters worse, the GAO report found that such software uses inconsistent methods to determine tax detectability, sometimes even asking the borrower to make the determination/calculation himself.

The main purpose of the report was to assess the ability of the IRS to properly determine and manage mistakes in mortgage tax issues, and in this aspect, the report was scathing. Due both to inadequate resources and insufficient information about taxpayers’ mortgages, mistakes were often allowed to slide. Although, the GAO found that the claimed deduction was understated as often as it was overstated, so the net result is probably a wash for the government.

In any event, it seems clear that something has to change. Either the IRS has to streamline paperwork associated with the mortgage tax deduction, or the government needs to revamp the rules. When you consider that the deduction costs the government $80 Billion in foregone tax revenues per year – especially in the context of the current budget problems – this could conceivably become a major political issue.

Over the last couple months, mortgage rates have beaten a steady decline, down to 5.4%, according to the latest Freddie Mac Weekly Primary Mortgage Market Survey. That marks a tremendous drop – relatively speaking – from the 5.59% notched in June.

The rate quoted above is the 30-year fixed rate, the benchmark of mortgage rates. It should be noted that this is a raw figure, as provided to Freddie Mac directly from mortgage lenders based on the rates paid by their customers. In this case, the average borrower paid .6 points to buy the rate down, which means that the par rate is actually higher. In other words, even if you have perfect credit, you can probably still expect to either pay a higher rate or pay a higher upfront fee.

Meanwhile, variable rate are currently running around 4.5% . If you opt for a 15-year fixed rate mortgage, you can expect to pay 4.46% interest (and .6 points). From this, you can see that the spread between 15-year and 30-year rates is a healthy .58% . In addition, since this lower rate is also spread over a shorter time period, the aggregate savings on interest will be significant over the life of the mortgage. (As an aside, there are other considerations in selecting a mortgage with a shorter term, namely whether or not you can afford the higher monthly payments. Especially given the current economic environment and the uncertain labor market, this is an important consideration.)

There are also wide regional differences concealed in the average figures reported by Freddie Mac, which can sometimes vary by as much as .3% from state to state. Recently, rates in the most distressed markets have tended to be lower than in healthier markets. This is perhaps explicable by lower demand for mortgages in states that have been hit hardest by the bursting of the housing bubble.

So, why have rates headed downwards? As I alluded to in the title of this post, it’s not for the most obvious reasons. In fact, mortgage activity is actually rising: “A four-week moving average that tracks mortgage application activity is up 1.7% overall.  Among refinance applications, that index is up 2.1%, while it’s up 1.2% for mortgage purchase applications.” In this case, an increase in demand hasn’t resulted in an increase in prices.

The reasons are manifold, but can mostly be found outside of mortgages/housing. For example, the Federal Reserve Bank has resumed its purchases of mortgage-backed securities (MBS) in recent weeks, as part of its program to stimulate both the housing market and the broader economy. Given that average mortgage rates rose when the Fed stopped buying MBS, and fell when the Fed started again, it’s obvious that this is an important factor. Another explanation can be found in US Treasury prices, which tend to lead mortgage rates up and down. Recent fears of a prolonged economic recession, low inflation, and a period of continued low interest rates have caused Treasury rates to sag ever closer to the all-time lows of 2008. Investors in MBS – from which the vast majority of mortgage rates are derived – seem to be taking their cues from low Treasury markets, and are buying MBS rates down proportionately.

Whether rates remain low, then, depends directly on the Fed and MBS investors. It seems unlikely that the Fed will continue to buy MBS in bulk, since all of those securities will have to be sold when the recession comes to an end. On the other hand, it’s conceivable that demand for Treasury bonds (and

MBS, by extension) will remain strong for as long as the economy remains weak. Still, as I wrote in the previous rate update, it doesn’t seem likely that rates will trend much lower, which means there’s no reason to delay if you’re thinking about taking out a mortgage or refinancing.

Anyone who has done any research into taking out a mortgage has surely heard of points, but based on the feedback of our readers, few seem to actually understand how the points system works. In a nutshell, points refers to paying an upfront cash payment in exchange for a lower interest payment (and lower monthly payment, by extension). It is also possible to receive a rebate (negative points) in return for paying a higher interest rate.

Many lenders take advantage of (borrower misunderstanding of) points in order to make it look like their interest rates are lower than their competitors, when in fact the difference can be explained entirely by the points. On the surface, paying points would seem like a great option, since mortgage affordability is generally calculated backwards, using monthly payment – rather than the size of the mortgage – as a starting point.

In this way, the numbers can be manipulated, such as to make it so a potential borrower can afford a larger mortgage simply by extracting an upfront payment in exchange for a lower monthly payment. Of course, this can also be achieved by simply increasing the size of one’s down-payment, but yields slightly different savings. Generally speaking, a higher down-payment is more economical in the short term, while using points to buy down the rate is only beneficial over the long-term.

So, how can you go about calculating whether it makes sense to pay points? This Points Calculator makes this question easy. Simply plug in the loan amount, points, interest rate, interest rate with points, loan term, and a realistic return on investment, and the calculator will quickly generate a break-even point- the amount of time it will take before you can achieve positive savings on your mortgage.

In other words, the points system inherently favors the bank over the short-term. It’s impossible to achieve savings from Day 1. Instead, you must plan on living in your home (and keeping your current mortgage) for a certain number of years before paying points becomes worthwhile. If you have every reason to believe that you will stay in your home longer than the break-even period, then it makes sense to pay points. Instead, if you plan on refinancing or “trading up” before the break-even period, it probably makes more sense to simply increase the size of your down-payment.

Another consideration is whether to roll the points into your mortgage, in order to avoid making a large up-front payment. This will significantly extend the break-even period and is only economical if your savings rate (i.e. expected return on investment) is higher than your mortgage rates, and your marginal tax rate is low. The latter is a factor because financing your points allow the tax benefit to be amortized over the life of the mortgage, while an upfront payment can only be deducted in the year in which it is paid.

Finally, it’s possible to temporarily buy-down your mortgage payment, such that you pay a lower rate for only a few years. The 2/1 buy-down and 3/2/1 buy-down are the most common and straightforward, with the latter reducing your interest rate by 3% in the first year, 2% in the second, and only 1% in the third year, before reverting to the stated rate. Typically, you shouldn’t expect to achieve savings from a temporary buy-down; rather the perceived benefit is that you can delay the normal payment for a couple years, giving your income a chance to catch-up.

The most recent Weekly Primary Mortgage Market Survey, conducted by Freddie Mac, revealed a significant drop in mortgage rates. “The average rate for a 30-year fixed-rate mortgage was 5.12 percent, down from 5.29 percent the previous week, Freddie Mac said. At this time last year, the average rate for 30-year fixed-rate mortgages was 6.47 percent.”

Rates are now at their lowest-levels since the week of May 28, when they averaged 5.91%. Moreover, the decline has not been limited to 30-year fixed rates, which is the most popular type of mortgage, and hence the most oft-cited. “The average rate on a 15-year fixed-rate mortgage was 4.56 percent, down from 4.68 percent the previous week…Rates on five-year, adjustable-rate mortgages averaged 4.57 percent, down from 4.75 percent a week earlier.” One-year ARMS and jumbo mortgage rates fell proportionately.

While most analysis/prediction tends to focus on the demand side – implicitly seeking to establish whether mortgage rates are low enough to draw in buyers – it seems that the recent rate declines are a product of supply-side changes. By now, most laypeople are probably at least somewhat familiar with the securitization process (if not because of the pernicious role it played in the credit crisis), which bundles individual mortgages into large pools, in order to dissipate risk and sell them to investors.

Well, it turns out, that these pools of mortgages (known in industry parlance as Collateralized Mortgage Obligations [CMOs]), has been particularly strong in recent weeks. Investors are growing more confident (some would say complacent) about the risk posed by such securities, especially with respect to current prices: “Non-agency home-loan bonds have soared from record lows as investors reduced the yields they targeted amid signs that the deepest housing slump, worst financial crisis and longest U.S. recession since the Great Depression are easing.”

The US government (via the Treasury Department) and the Federal Reserve Bank have also been active. Specifically, there is “speculation that Treasury Secretary Timothy Geithner’s Public-Private Investment Program, or PPIP, will add as much as $40 billion of demand,” while the Fed’s “Holdings of mortgage-backed securities jumped $66.6 billion to $609.5 billion” last week, as part of its $1.25 Trillion plan to boost the housing market.

Going forward, it’s unclear whether these government purchases will continue. Already, the “Treasury and Federal Reserve said in a statement today that ‘they do not anticipate any further additions to the types of collateral that are eligible for’ the central bank’s Term Asset-Backed Securities Loan Facility,” which could make private investors wary of holding mortgage securities. Ultimately, such investments will only remain attractive if the housing market continues to stabilize and the foreclosure crisis is brought under control. Stay tuned…

The majority of borrowers probably don’t understand the difference between mortgage lenders and mortgage brokers, especially in the practical sense. A google search for the term “mortgage broker” yields mostly stories related to scams and fraud. While this is helpful in one sense – by making potential borrowers aware of the potential for unscrupulous behavior – it does little to clarify what exactly mortgage brokers do.

In a nutshell, mortgage lenders originate (and often underwrite) mortgages directly, while mortgage brokers work as intermediaries, connecting mortgage lenders with borrowers. If that’s the case, those of you unfamiliar with this dilemma are probably scratching your head and asking yourselves, “Who would be dumb enough to voluntarily pay for the services of a middleman, when he could go just go directly to the source?” According to the most recent data, the answer is two-thirds of all borrowers.

In fact, the system is not as straightforward as you would think. In fact, most lenders operate on two levels: retail and wholesale, with corresponding prices and rates. An individual borrower, such as yourself, would be offered retail pricing, while a mortgage broker would be offered wholesale pricing. For their part, mortgage brokers naturally exact a healthy commission, which would more than eliminate the savings from buying wholesale, all else being equal.

Of course, using brokers offers certain key advantages. While lenders, especially regional or community-based lenders, only offer a handful of different mortgage products, a mortgage broker should have access to the complete spectrum. Of course, a resourceful borrower could certainly search out a lender that offers the type of mortgage that he is looking for, but this naturally assumes that he already knows what kind of mortgage he wants. In fact, most borrowers wait to make such a decision until further along the process. In addition, it could involve significant legwork to find a lender that has what you’re looking for, and is competitive in pricing.

Another advantage of working with a broker is that they can potentially save you time and energy, by helping with paperwork, gathering documents, and generally facilitating the process. A good broker should protect you from lender “abuse,” by negotiating down/away any junk fees. Borrowers with special circumstances (i.e. can’t document their income, need to close immediately) would also do well to consider engaging a broker, as certain lenders might not be amenable.

Before you accuse me of being a shill for the mortgage broker industry, let me also point out the disadvantages. The main disadvantage is price. While it’s impossible to say definitively that brokers are more expensive than lenders, common sense suggests that all else being equal, they are. Brokers that are most competitive on pricing tend to be smaller (less overhead), which could be considered a disadvantage, since it doesn’t offer the same sense of security that bigger firms tend to project.

For those caught in the middle, there is another option that represents a sort of compromise. It involves finding a broker that is willing to act as your agent, rather than as an independent contractor. The difference is largely semantic, but if negotiated properly, it could result in significant savings. Whereas most brokers earn money from charging a spread on the wholesale rate they receive from the lender, a borrower’s agent will work for a fixed commission, such that you will pay the actual wholesale rate. Sounds like the best of both worlds!

Three weeks ago, the Mortgage Calculator concluded a post as follows, “Unless something dramatic happens and/or until there is stronger evidence that the economy is recovering, I don’t personally expect rates to fluctuate much over the next few weeks.” Since then, rates have increased by a modest .05%, without fluctuating by more than 6 basis points in either direction during that period. Sorry to toot my own horn, but I couldn’t resist the opportunity…

According to Freddie Mac, the vanguard for mortgage rate data, “Mortgage rates in the U.S. rose for a second consecutive week…The average 30-year rate increased to 5.25 percent from 5.2 percent…The 15-year rate was 4.69 percent.” Despite having risen above the record low 4.78% touched in April, mortgage rates still remain well below the 2009 high of 5.6%, and even further below average historical levels. For borrowers that opted to use points to buy down their interest rate, “The nationwide average in the Freddie Mac survey was 0.7 point for 30-year and 15-year fixed mortgages. Five-year, adjustable-rate mortgages averaged a 0.6 point, and one-year, adjustable-rate mortgages.”

Still, it’s not clear that lower rates are trickling down and resulting in actual loans. The Mortgage Bankers Association “seasonally adjusted index of mortgage applications fell 6.3 percent from the previous week.” But this can be attributed to lender reluctance, rather than a decline in borrower demand. “Rates may be low, but I think lenders are still being very cautious. Lenders are just being careful about who they lend to,” said one analyst.

There is also evidence that the composition of mortgage lending is changing. “The number of people refinancing also decreased to 52.6 percent of the total applications from 55.5 percent the previous week.” It’s difficult to say whether this is a good sign or a bad sign. On the one hand, it signals that refinancing activity may be leveling off as rates trend upwards, but it also signifies that more first-time borrowers are entering the market, relative to existing borrowers.

At this point, mortgage rates still appear close to equilibrium, with prices being driven more by financial market dynamics than by the supply and demand for mortgages. “Bond yields rose slightly higher this week on market optimism that the economy may be stabilizing somewhat, and mortgage rates followed those yields,” said Frank E. Nothaft, Freddie Mac’s chief economist. In addition, as the stock market rallies, many investors are shifting funds from bonds to stocks, which tangentially results in higher mortgage rates.

Stay tuned for tomorrow’s post, when we examine in more detail how (a lack of) fluctuations in mortgage rates is affecting the housing market…