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Justice
For Homeowners Article |
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How do I choose a mortgage product in today’s market?
By
Morgan Brown
I am working
with a bunch of home buyers right now. Their
home buying experience and the process of
securing financing has been rockier than
most would like it. I feel bad for them. I
wish there was something that I could do to
make it better; but they have run in to
volatility in the mortgage bond market not
seen in at least 3 years.
If you wonder why my blogging has dropped
off to just nights lately; you now know why.
Volatility in the market requires a
herculean effort to help customers navigate
the turbulence. The number one question from
my customers (as they watch their 30 year
fixed quotes blast towards and above 7%) is:
What mortgage product do I choose right now?
It’s not an easy question to answer; and
more than ever, this one is completely
dependent on your particular situation. Here
are some thoughts that I believe you should
consider when determining what type of
mortgage product you should choose right
now.
Please note that I have no crystal ball.
Find your sweet spot
Everyone out there has their own ideas about
what is risky and what is safe. Everyone has
their own comfort level when it comes to
money. It’s amazing - for the smart,
rational, brilliant people we are; money is
more of an emotional object that an
intellectual one. We have an emotional
connection with our money; either its a weak
emotional one and we are more risk friendly
or it’s a strong emotional one and we are
more risk averse. I’m not saying that
intellect doesn’t play a big part - I’m just
saying let’s be sure to consider our
emotional connection to money.
When we are talking interest rates we are
talking money - and you need to find your
personal sweet spot in your emotional
comfort level. Take stock in where you think
your risk sweet spot is - and use that as a
guide to where to look when shopping for
different loan programs.
Be Goldilocks
I have spent a lot of time thinking about,
analyzing and reviewing dozens of unique
borrowing situations over the last few days
as interest rates have jumped. I have seen
the classic Goldilocks behavior bear out
(pun, thank you) during the recent market
changes:
Some borrowers go to the high cost 30 year
fixed for ultimate security
Some borrowers go to the mid-length ARMs
such as 7 and 5 year fixed loans
Some borrowers continue to gamble with a
short-term loan or are floating their
mortgage hoping for rates to reverse course
Who’s right? In my opinion, for most people
who are buying a home that won’t be the last
one they buy, the right thinking is the
Goldilocks thinking. Choosing a 7 or 5 year
fixed loan gives a good balance of
mid-length security with 5 or 7 years of a
fixed rate; while providing a lower monthly
payment than a higher-rate 30 year product.
In other words - it sounds just about right.
God doesn’t play dice, and neither should
you
The short term rates, two-year loans and
traditional 1-month ARMs should only be used
in very specific circumstances where there
is a clear plan for you as a borrower. This
may be a credit-improvement plan, short-term
housing plan or other very specialized
mortgage situation. I can’t think of a good
reason to use a short-term ARM when
purchasing a home in this market.
The Losers sell at the bottom and buy at the
top
The old Wall Street adage that the masses
get slaughtered because they always sell at
the bottom and buy at the top holds true in
the mortgage world. While I believe that
interest rates aren’t topping out quite yet;
I do believe we will reach a stable level in
the next few (6?) months. There is no
benefit in locking in to an expensive 30
year mortgage payment if we are near the top
of the market; especially if you have a good
indication that your financial or living
situation will change with in the next 5 to
7 years.
As the intermediate ARMs become a better
value in terms of cost and rate compared to
the 30 year rates it becomes critical to do
your best forecast of how your life will
look in the next 5 to 7 years.
If we are near the top (and I can’t say with
confidence that we are) then doesn’t it make
sense to lock in to something with a little
more flexibility that is a little less
expensive? I had a customer ask me about
buying down a 30-year fixed rate (buying a
loan down is where you pay points to the
bank for a lower interest rate) and then
immediately ask their options of refinancing
in 6 months. You don’t pay thousands of
dollars for a lower rate when you plan on
refinancing in the near term. You also don’t
take a more expensive 30 year loan if your
mind is set on refinancing within a couple
of years!
Go for flexibility
I strongly recommend to home buyers in this
market to go for flexibility. If your credit
scores allow, avoid prepayment penalties
that lock you in to an interest rate for any
fixed amount of time. If we are near the top
of recent rate hikes it makes sense that the
first rate decrease may not be too far off
in the distance (within a year?) If that is
the case do you want to be stuck paying a
higher interest rate due to a prepayment
penalty when rates ease? I didn’t think so.
If you do take a prepayment penalty to lower
your rate try to take one for a maximum of
one year. That will give you a combination
of flexibility and lower payments without
overly limiting your flexibility.
In summary - this was a very hard post for
me to write, because each situation is
different - your situation is different. My
advice is to find the sweet spot - be
Goldilocks, find a loan that is just right
for you. Don’t panic and lock yourself in to
a program that is too expensive for you and
overly stretches your monthly budget; don’t
put yourself in a situation where you can’t
take advantage of falling rates (should that
occur) and don’t be foolhardy and put
yourself at the whims of an unfriendly
market (short term ARMs).
Conclusion
Are you one
of the many that suffer from insurmountable
debt and wonder if bankruptcy is an option?
Give us a call at (203) 924-6700 or
contact us.
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