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Mortgage Rates Soar Despite Fed Interventions

by Peter G. Miller
October 20th, 2008

Given all the steps taken during the past month to calm the financial markets you might think that mortgage investors — the folks who buy local loans — would be a touch more secure.

That does not seem to be the case, however, judging from the sharp and sudden increase in loan rates last week. According to Freddie Mac, a basic 30-year fixed rate mortgage could be had for 6.46 percent — that’s up from 5.94 percent the week before. In both cases you need to add .6 percent for points to get the full rate.

How big a jump is the new rate? According to Freddie Mac, the increase of 52 basis points was the largest weekly increase since the week ending April 17, 1987, when the rate for 30-year fixed-rate mortgages rose 84 basis points.

For FHA mortgage borrowers the new rate means that the effective cost of an FHA loan now tops 7 percent. How? First you have the 6.46 percent interest rate. However, that is not the “par” value of the loan — the interest rate without points. Add in .6 percent and we get a rate of 6.52 percent over 30 years.

But — whoops — most loans don’t last 30 years. The usual comparison for investors is with a 10-year Treasury security. If we calculate the value of .6 percent over 10 years the real interest rate is now 6.59 percent.

Add on .55 percent for the FHA mortgage insurance premium (MIP) required for most FHA borrowers and the rate is well north of 7 percent.

What to do?

If you think rates will rise, ask you lender about locking in the rate. Some lenders allow one re-lock prior to closing if rates fall — ask about your lender’s practices in this area and get responses in writing.

Meanwhile, rates for a 30-year ARM rose one hundredth of one percent to 5.16 percent last week. Why so little movement with ARMs rates? Because if you have an ARM you bear the cost of future inflation and higher interest levels, not the lender.

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This entry was posted on Monday, October 20th, 2008 at 2:13 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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