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Ronnie Said:

What is Mortgage? How does it's interest rates of mortgages affect the sale of houses?

We Answered:

a mortgage loan is really two parts. There is the finanacial responsibility of the loan, this is the note and whomever applies for the loan signs the note. the mortgage itself or deed of trust depending on what state you live in, is signed by the individuals holding title to the property. One person has to be on the deed and on the note for the transaction. This document is the agreement between the title holders and the bank to use the property as collateral for the loan.
Most borrowers are pretty uneducated about interest rates as then tend to believe it's the sole factor in either a purchase or refinance transaction and many times they don't see the bigger picture. Rates themselves are only a small portion of the purchase picture, individuals need to find a home they like, the seller needs to cooperate and be flexible, the home has to pass inspection, the seller could get a better offer or a cash offer, the borrower has to get approved for a loan, there's a tremendous amount of factors that goes into a purchase.

Kent Said:

Why do mortgages interest rates change?

We Answered:

1 - if the Fed has cut interest rates, wouldn't that rate cut trickle down to the mortgage

A: US interest rates are determined by the US Bond market.
Many banks are charging a premium because they are concerned about default risk.

Look at 10 year Treasury prices (benchmark for most consumer rates).

Compare that to the LIBOR rate (many mortgages tied to LIBOR).

LIBOR = London Interbank Offer Rate. Complicated. Basically it's an agreement with all U.S. charter banks under UK law.

2 - Were people informed of the "ballooning" that was going to happen?
Yes, I have been saying this since summer 2005. Most people, and lenders weren't paying attention.

3 - Why did lending institutions issue mortgages at adjustable rates knowing that they were going to increase out of peoples budgets?
Greed. Easy money. Lenders resold loans to Wall Street and to banks and governments world wide to reduce their loan risk.

How did we get in this mess?

1. Former HUD director, Henry Cisneros under the previous administration strongly advocated that we should have home loans to more people, including people who could not afford them by current standards.

2. The FED kept rates at historical lows which made this job easy.

3. Real estate prices soared with these low rates and money that moved out of the stock market in 2000-2002.

4. By 2004, the FED began raising rates due to their nutty idea on inflation fears. Their inflation ideas was and is wrong. The FED mistakenly saw inflation but failed to attribute the cause was driven by higher commodity prices (oil, corn, wheat, steel, milk, etc). The big drive in oil prices was and is due to demand for oil by China and India's explosive growth. These FED rate hikes continued until 2006.

5. The FED Funds rates went from 1.00% to 5.25% in two years - a 425% increase in rates. This killed the subprime market and hit everyone with an adjustable rate mortgage, no money down mortgage, and interest only mortgage.

6. Greedy banks and other lenders were lax on their credit standards and gave out loans to anyone without any qualifications. This was a mistake.

7. The higher rates triggered loans to go into default as many people could no longer afford their house payment. They should not have got the loan in the first place.

8. Some alleged "predatory lending" may be a slight factor. It is ridicules to think that someone could buy a $500k home who makes $18k a year, and never expect rates to rise and never expect home prices to fall.

9. Creditors made their own problem worse by tightening credit standard in spring/summer 2007. The tighter standards increased defaults. As defaults increase the problem perpetuates on itself. Mortgage insurers are partially stuck with huge losses as they guaranteed payment on these higher risk loans. These companies are 1 step from bankruptcy right now (ABK, MBI, PMI,. MTG, RDN).

10. Banks and other lenders began taking huge losses as they write off part of their bad loans. This problem is huge. Banks and lenders will not admit how bad their portfolio really is. The result is the wave of selling in the stock market.

Future issue?

Bad credit card portfolios. if people can't pay their mortgage, what makes anyone think they can pay their credit card?

Proof Note: Amer Express (AXP), Capital One (COF) reported large Q4 (2007) losses due to credit card defaults. Were just getting started with this issue.

Bill Said:

How do percentage rates work on mortgages?

We Answered:

The percentage rate is the percentage you are charged on he outstanding amount of the loan *per year*.
If you borrow £100,000 and pay of once per year (to simplify the calculations) you will attract £6,000 of interest. So if you pay £12,000 per year the amount remaining will drop to £94,000.
The next years interest at the same interest rate will be £5640 so if you pay £12,000 again the the amount remaining will drop to £87,640. As you see it goes down quite slowly. When you get a morgage the bank will work out how much you can afford at the current interest rate over the period you want to borrow and tell you how much you can borrow to buy a house.

Brandon Said:

How do lenders come up with the interest rates for mortgages?

We Answered:

That is not to say that when the fed lowers rates the mortgage rates don’t tend to fall slightly but not in unison.

The question i think you want to know is why the rate quotes differ so much does. The fact is all mortgage professionals are finding rates from the same pond so to speak.
lenders and brokers have rate sheets it shows the rates that would be available to you what most people don’t know....simply put it shows the rate with the borrower paying no points to get a lower rate and then the other which is it shows the lender or broker your rate that would pay him a yield spread! 1/2% of loan amount to as much as 3% of your loan amount

And in some cases the borrower has no idea of this! Or it is explained away when you see a high APR by saying the reason is because of the closing costs. Closing costs do move the apr higher but considering the apr is factored over the life of the loan 30 years or whatever your term is.

The term is yield spread or back end money. most brokers and lenders even banks split the amount they want to make between the lender fee and yield spread so if a lender wants to make 3% then they show half in the front of 1 1/2 % lender fee.
Borrowers should always focus on the rate. It is unfortunate that so many brokers use the raising of rates to make more money and that doing this can cost the borrowers tens if not hundreds of thousands of dollars in added interest.

The simple fact is you need to use a loan comparison calculator to show the differences in loan offers. 1/2 % higher rate on a 30 yr fixed with a 250k home loan is 48,750 in additional interest!
Remember that the majority of the first 10 years of mortgage payments go toward the interest you owe!

HERE IS A CALCULATOR TO SEETHE BIG PICTURE

Wade Said:

Freezing the rates on adjustable rate mortgages is like which of the following?

We Answered:

In my opinion the people who took out loans they could not afford should loose there homes. Any creditor who borrowed money to someone that they shouldn't have has to deal with those consequences. It may not be nice for the people involved or the creditor but it is a legal and binding contract. If the mortgage company wishes to do this on its own then it can, but the government should not intervene on a contract, in fact I’m not even sure it is legal for them to do so.

Annie Said:

Generally speaking do the rates for mortgages go down when the feds cut rates?

We Answered:

No direct relationship, but frequently have impact. Feds rate is cutting rates banks charge each other. So can't answer, and yes it could move either way.

Presumably you're getting a fixed rate loan. If an adjustable rate loan, those rates are frequently tied to feds rate and can definitely rise and fall. The fixed rate loans are not directly tied. But the adjustable rates loans given to those with poor or no credit is what caused this mortgage crisis. Don't follow them!

Eugene Said:

Will interest rates on mortgages start to go up?

We Answered:

down, depression