“Safe Haven” Impacts Home Loan Rates

Recent news reports from Japan and the Middle East have been impacting our markets as Traders attempt to manage risk. But do you know how this impacts home loan rates?

Here’s What You Need to Know

The first thing to understand is the concept of "safe haven trading." At times of global unrest and uncertainty, like the nuclear crisis in Japan and ongoing fighting in Libya, Traders park money in "safe" investments like Bonds. And since Bonds such as Mortgage Backed Securities (MBS) are tied to home loan rates, when Bond pricing improves, our home loan rates can improve.

But it's also important to understand how incredibly volatile this situation is. A "safe haven trade" is a short-term trade. Should events around the world become more stable, this safe haven trade can unwind very quickly - with Bond prices and home loan rates worsening as a result.

In addition, we cannot overlook the impact of inflation, which is the archenemy of Bonds and can negatively impact home loan rates. One news item that pressured Bonds recently was word that inflation in the United Kingdom (UK) jumped to the highest level in two years in February. This is important because inflation around the globe can seep into the US.

In fact, we're already seeing it as the Fed's favorite gauge of inflation - the Personal Consumption Expenditures (PCE) Index, was reported up in February. Additionally, Producer Prices are running at hot levels...with prices up 3.3% in just the last three months. If pricing pressures don't recede for producers of goods and services, companies will have one of two choices:

Either: Absorb the higher cost of goods - and, thereby, hurt earnings growth.

Or: Pass those increased costs onto consumers - thereby, creating consumer inflation.

Both of those scenarios would be bad for Stocks and Bonds. And since home loan rates are tied to Mortgage Backed Securities - which are a type of Bond - those scenarios would also be bad for home loan rates.

The Bottom Line

If inflation is allowed to grow, it can be very difficult to rein in and control...and this will hinder improvement in home loan rates. And, when the situations in Japan and the Middle East eventually stabilize or improve, we could see further unwinding of the "safe-haven" buying of US Bonds, which will also hinder improvement in home loan rates.

The Good News

Fortunately, home loan rates are still at very attractive levels for now. So if you've been thinking about purchasing or refinancing a home, this is the time to see how you can benefit before rates possibly move higher.

Call or email today - and please forward this newsletter on to a friend or family member who could benefit from this information.

Lower Payment vs. Lower Rate of Interest

With interest rates still near historically low levels, an argument can certainly be made for people considering a shorter mortgage term, such as a 15-year fixed rate mortgage. But there are some important factors to consider.

Of course, the greatest benefit of choosing a shorter term is knowing that the mortgage will have a zero balance in 15 years, saving the borrower thousands and thousands of dollars in interest payments over 30 years.

However, the lower rate and shorter term come at a monthly cost for borrowers. The difference between the monthly payment for a 30-year fixed and a 15-year fixed can add up to hundreds of dollars more per month for the 15-year fixed. And in these tough economic times, "cash is king." That is, "cash on hand" is king.

Therefore, many people may be better served by having a smaller mortgage payment under a 30-year fixed - and then saving or investing the extra money. Note, saving and investing rather than spending the extra money is the key point here.

In particular, people who find themselves without a job or who have a pressing financial need would benefit from being able to access these saved funds.

Best Path for all Prospective Borrowers

If you or someone you know is looking to refinance or buy a home, you should remember that a number of attractive mortgage options are still available. However, since an individual's or family's mortgage payment is often their largest monthly payment, it's important to get advice about your unique situation in order to make the best decision.

Call or email today to discuss which options you should consider based on your short- and long-term financial objectives. We can break down the projected costs of those options - not only for the complete term of the mortgage but also for the time you expect to have the mortgage in effect.

Q&A: Impact on Credit Scores?

QUESTION: Can a Home Equity Line of Credit (HELOC) impact my credit score?

ANSWER: Credit expert Linda Ferrari (author of "THE BIG SCORE: Getting It and Keeping It, Buying Power for Life") explains that HELOCs are commonly categorized as revolving accounts. As a result, they are rated using the "Balance to Limit" ratio scenario, which can drop a credit score by as much as 75 points if the HELOC is maxed out to the limit of the available credit line.

If you or someone you know has a HELOC, Ferrari recommends sending a Certified Letter (along with a copy of the HELOC agreement) to the three credit bureaus asking them to change the type of account from "Revolving" to "Line of Credit" or "Other" which can help improve your credit score.