After bottoming out around 4.25% last fall, mortgage rates for 30-year fixed-rate loans have recently moved above 5% for the first time in about a year. Commentators observe that rising rates will cause some buyers to rethink the advantages of home ownership, but generally conclude that they are not a critical threat to the housing market.

The Wall Street Journal and Zillow reported that median down payments for “conventional” mortgages rose from about 5% at the end of 2006 to 20% in 2008 in a study of 9 cities. The article also notes that mortgages backed by the Federal Housing Administration (FHA), requiring only 3.5% down payments, have increased in popularity and were used in about half the purchases in 2010.

It seems to us that there are two separate things going on here. The first is related to the overall economy and the financial policies of the country. Mortgage rates are based on the yields of the 10-year Treasury Bond. If the creditors of the United States are demanding a higher interest rate, then those higher rates will trickle down to mortgages.

The second factor influencing mortgage terms is the continued evolution of the American mortgage industry. Lenders have taken a lot of losses from their loan portfolios over the past 5 years. Not surprisingly, they’re trying to improve their business practices to make these sorts of situations less likely in the future. What mortgage products should be available? What should lenders require of buyers? What makes a borrower creditworthy? What role will the government play?

We have no special insight into either of these two issues, or the direction of mortgage rates in general. And we suspect that nobody truly knows how they will evolve over the coming months and years. However, we do know that buyers still have an opportunity to secure financing with low down payments. And we can report that while rates are a little bit higher than they used to be, they’re still very low from a historical point of view. Your guess is as good as ours when it comes to where rates move next.

The special offer bounty covers a wide spectrum. Some is relevant and useful though much is opportunism, “These buyers just shelled out hundreds of thousands for a house, so maybe we can convince them that a few hundred here and there is a prudent additional expense.”

Since there is no real difference between a mortgage closing via a purchase or a refinance, we’ve been the lucky recipients of much of this marketing over the past couple months. It’s been interesting to see what is offered, how it is presented, and how persistent the different companies are. Here’s a sampling of some of the exciting opportunities that we’ve received:

• Coupons from Big Box Home Improvement Centers: Of the haul, these seem most likely to be helpful. Just about all houses need a little something here and there, whether it is a small repair or just some personalization.
• Coupons from Home Design/Accessory Stores: These can also be helpful, but the ones we received are not all that scarce. They regularly send out the same 20% off coupons, so it’s not like this is truly a special deal for home buyers – the text is just different.
• Gutter, Windows, and Roofs: We received a surprising number of offers to help out with moderately sized/priced home improvement projects. Sometimes they came from manufacturers, but more often they seemed be sent by the local contractors who would actually do the work.
• Water Treatment System: This seemed really random to me. I know that water treatment systems are critically important in some areas, but I don’t really see all that many of them in our area. The MDC water is actually quite tasty!
• Credit Card from Mortgage Servicer that Pays Down Principal: I give extra credit for being creative; this is a sales angle that I hadn’t seen before. Unfortunately the rewards points are less generous than other cards available.
• Mortgage Insurance! Mortgage insurance must be a very profitable product to sell, because we’ve received more than 20 offers so far. The companies are so aggressive that it immediately raises my guard. And the numbers don’t sit well with me. The benefit decreases over time (because I’m paying down my principal each month) even though I’ve paid more premiums and am more likely to die? I must not understand the product properly…

If you’ve been through a purchase recently, have you received anything worthwhile? What’s been the most outrageous solicitation?

The Fed’s big picture goal is to reduce unemployment, and hopes that injecting more money into the economy will encourage businesses to begin taking risks to expand their operations (hire more workers), which would hopefully also boost confidence and inspire consumers to increase their spending.

Analysts, economists, and investors have been debating the merits of the expected plan for weeks. Some feel it will be modestly helpful in supporting the business environment, while others are quite pessimistic. Ultimately this sort of indirect economic stimulus relies on a chain of events, with many types of participants, so it’s impossible to predict what will happen with any level of confidence.

Commentators do seem to agree that the Fed’s move will continue the very favorable refinance opportunity for homeowners. Because mortgage rates are generally based on the long-term US Treasury Bonds, and those are the exact securities the Fed plans to purchase, rates should be directly impacted by the program. Again, there are various opinions as to how much lower mortgage rates may go, but I have not seen any articles expecting them to rise.

The refinancing opportunity appears as though it will be extended again. Homeowners with strong credit and positive home equity may want to consider improving their interest rate and/or shorting the length of their loan. Just keep in mind that there is an up-front cash cost to refinancing, so in order for it to make sense homeowners should plan to be in their property for at least a few more years. We’re happy to share our experience with the process and suggest mortgage professionals – just call or email.

Although the article is definitely in line with our thinking, there are a couple of statements that concern us. So we thought we would write a quick companion piece.

The homeowner used in the example paid $213,000 in 2006, but was told today that she shouldn’t list her home for more than $218,000. She said, “I would have lost money on the deal.”

We’ve unfortunately been seeing homeowners talk about “losing money” on their real estate a lot recently, but they often mean very different things. Some look strictly at the price they paid versus the price they expect to get in a sale. Others will add the cost of their improvements to the price they paid and then compare that to what they expect to get in a sale. And still others will deduct the transaction costs from the expected sale price before comparing to their cost.

We think that the correct cost to consider is the purchase price plus the cost of improvements. And the appropriate value for the house is the expected sale price without deducting the transaction costs.

That being said, homeowners shouldn’t expect to get all of their money out of improvements. Part of the reason is that many improvements are actually maintenance costs – keeping a home in proper working condition – and maintenance costs have very little value to potential buyers since they expect a home to be in proper working order. Even projects that are truly enhancements to a property typically don’t pay back at 100%. The main reason is that we design to our own personal tastes, which are usually different than that of others. Swimming pools are a classic example of an improvement that is owner-specific, but on a smaller scale it’s things like the choices of cabinets, counters, tile, and other long-lasting decorative elements. As homeowners we have to factor in the enjoyment we get from living in a space that feels inviting to us.

“Looking back, [homeowner] knows that she paid too much when she bought her first house in 2006.”

Prices and markets have to be evaluated in the moment. This statement could be true, but the only way to tell would be to analyze data from 2006 to see if the price she paid was in line with what other comparable homes were selling for at the time. That’s one of the main benefits of working with a real estate agent – they can analyze the data to make sure the seller’s asking price is reasonable.

We’re finding that some owners are comparing values in the current market to what they paid years ago and concluding that since the value of their home has not increased they must have overpaid. Residential real estate markets have changed considerably over the past few years, so it’s quite possible that a property that was a great buy in 2006 is now worth less than its purchase price.

If she holds the home for another 20 years, will she still feel she overpaid?

All in all, the process was pretty painless and easy. First, we had plenty of equity in the house based on the initial down payment we made the first time we purchased and the fact that we’ve done improvements to the home since we’ve owned it. Some folks trying to refinance now are finding that they don’t have enough equity in their homes, making it impossible to go through the process and get a lower interest rate. Second, Kyle is a master document keeper/organizer, so he had all of the paperwork we needed to submit at his fingertips. (Don’t ask me where it is, I have no idea, he’s the obsessive/compulsive about that stuff). Finally, we had the cash available to close. It was a little over $7,000 out of pocket to cover the lender charges, escrows for taxes and insurance, and the title insurance fees. We will get a good chunk of that back when Wells Fargo releases our previously escrowed tax and insurance payments for the mortgage that was just released as we refinanced. Still, we had to have cash money available today to make this all happen.

As we went over the HUD statement with our closing attorney I asked him what he thought about the fees that we were charged. Were they in line with all of the other refis that he’s closing? He mentioned that he felt they were fair and comparable to two other lenders that I know many people use. He also mentioned that our rate was very competitive. That of course made me feel good.

Now, what next? Well, I don’t expect that we’ll be refinancing any time again before the mortgage is paid off in the next 15 years. That loan was really cheap at 3.75% and I don’t think we’ll ever see anything substantially lower than that which would encourage us to refinance again. So we’ll stay put and pay this sucker off. Because we REALLY like this place.

Buying a home is a process punctuated by events. We think that buyers should understand what they are getting into at the start, and hope that they find a home that meets their needs and feels right for them. Just as important, we think that buyers should have fun along the way.

That’s right, buying a home should be fun!

It should be fun to check your email in the morning to see what’s new on the market. It should be fun to visit the different properties and debate their pros and cons. It should be fun to get a call from your agent to let you know that they found a home that looks very promising.

Sure, a home search can be difficult at times. Buyers often need to adjust their criteria and expectations as they learn about the market. And missing out on a promising house can be emotional. There are lots of things that can go against you throughout the process. You just have to keep the big picture in mind and not get too worried about every little thing.

A big part of keeping an even keel is knowing what to expect. Research the home buying process and don’t be afraid to reach out to the professionals for help. Mortgage professionals and real estate agents are the first to get involved, but you’ll also need a real estate attorney once you really get into the search. None of these people will bite. Their careers are based on providing top-notch service.

Well, I guess that’s it. That’s all the advice there is to give on the topic of buying a home. So that brings us to the end of Buyer’s Week on the Greater Hartford Real Estate Blog – thanks for joining us for this special event.

Oh, who are we kidding, it’s always Buyer’s Week and there’s always more advice to give! Now that we’ve touched on some of the major topics, what other questions do you have about the process?

Unless you’re independently wealthy, the first step in buying a home is talking with a mortgage professional. They are the gatekeeper in the whole purchase process; checking credit, verifying income, and generally making sure that you are qualified to secure a gigantic loan from risk adverse lenders. From a buyer’s point of view, there are two main reasons to get this out of the way early.

1. Mortgage people may tell you things about your credit you didn’t know. Unfortunately most of the surprises here are bad ones. Finding out about a credit problem is by no means the norm, but the sooner you know about an issue, the sooner you can address it and start building your score back up.

2. It’s depressing to look at houses you can’t buy. Some buyers can’t buy a house because a credit problem will prevent them from getting a mortgage. Others can get a mortgage, but their income qualifies them for a smaller loan than they expected. Either way, it is depressing to look at homes you cannot buy. Buyers are always trying to get as much as they can at their price point, and when they suddenly learn their price point is way down there (or zero), they lose a lot of the excitement that initially comes with the search. Looking in the appropriate price range from the beginning is the way to go.

Getting preapproved for a mortgage is a quick process, so really there’s no excuse for not doing it. And since you’ll need to have it in hand before writing an offer, you might as well get it out of the way at the beginning of the search process.

Even after the credit crisis there are still many places you can go for a mortgage. Regional or national banks, specialty mortgage brokers, and credit unions are the main options we see our buyers choosing. It’s worthwhile to call a few different places to compare rates and terms because they can vary. In addition to asking about current mortgage rates, we would also suggest you ask about points, estimated closing costs, when in the process you can lock in a rate, the length of the rate lock, and how long recent mortgages have taken to get through underwriting.

If you’re thinking about a purchase, we would be happy to take a few minutes to talk with you about the process and pass along some mortgage contacts if you need them. Just let us know how we can help.

All four lenders that I initially called responded quickly to the voicemails I left them. Three were brokers that have several banks available to them and one was a local credit union.

They all said that they’re getting lots of refinance calls these days. I indicated that we would be interested in refinancing from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage, we had enough equity in our house to refi and our credit scores were strong. The main unknown for us would be income requirements because we are both self employed and lending requirements have changed regarding the required documentation for self employed individuals.

All of the lenders I spoke with indicated that we should have no problem moving forward with a refinance, even with our self employment status. Our income history was strong enough, we would just need to submit more documentation (full tax returns, income statement and balance sheets) than a traditionally employed person. You know, people that work for The Man.

Some would be able to have the process done in as quickly as 4 weeks, while others indicated they were closing 60 days out now because of such a backlog with the paperwork processing of all the files they were closing. We weren’t too concerned about closing in 30 versus 60 days, just as long as we could lock our interest rate.

Surprisingly, all of the lenders had almost identical estimates for closing costs. None would be charging us points. Some could lock us right away, while others had to wait until the appraisal was done. We ended up going with a lender that gave us a 60-day rate lock and the lowest rate.

Three of the lenders quoted us a rate of 3.875%. The rate we ended up locking at? 3.75%. Whoo hoo! Better than our little financial models we concocted were using. So our overall savings on interest would be an additional $2,500 lower than what we budgeted. A grand total of $112,500 that we won’t have to pay some stinky bank. Double whoo hoo!

What’s happening at this point is reams and reams of paperwork. Lot of documents for us to read through and sign. Also lots of financial documents from us to scan and upload to the lender’s system. Next week is our appraisal. There’s actually plenty of data in our neighborhood for the appraiser to use. I have a value in my head for our house which I think is pretty conservative. We’ll see if they meet or exceed it. However, they’re apparently coming from New Haven, which makes me think that they don’t know Hartford all that well, so we’ll see what they come up with. We’ll let you know how that goes next week and I’ll talk more about the appraisal process then.

The big questions:

1. Is it worth it – how much of an impact will a lower rates have? For us, the attraction is paying less interest over the life of the loan. We’re going to be trying to refi into a 15-year mortgage, with rates at right about 3.875% right now, which will actually increase our monthly payment by about $300 a month, but reduce the overall interest we pay over time by $110,000. (Holy crap!) We’ll knock 10 years off our current (remaining) mortgage. The principal portion of our monthly payment will be almost 3x greater than in our current mortgage.

2. Do we have enough equity in the house? Home prices have dropped in our neighborhood since we purchased, but our down payment and upgrades should make the appraisal on our home high enough to refinance without being forced to bring extra principal to closing.

3. Does this overcome the up-front investment in closing costs? Unfortunately, refinancing a mortgage has meaningful closing costs that will not be recovered. For example, we’ll need to hire an attorney, pay for an appraisal, buy title insurance, and pay the lender, among other things. We think the answer is yes, it does make sense to invest a couple thousand in closing costs now to reap the benefits over the coming 15 years (we don’t plan on moving).

4. Will a bank lend to us? We hope so! But I guess we’ll find out soon.

One of the main reasons we’ve decided to refinance is the lack of good investment options. Money market accounts pay basically nothing. Stocks are no longer the comfortable long-term bet they were during much of last century. Bond yields are very low, so interest rates are low. This also means bond prices are very high – they’re much more likely to fall in value than rise. Where should we be investing?

Rather than choose between those unattractive options, we’re going to take this opportunity to improve our debt situation. By paying 3.875% instead of 5.375% it’s like we’re “earning” 1.5% on the entire mortgage principal balance. Our investment in closing costs should break even after about 12 months.

Since we’re in real estate, we know a lot of lenders. I’ve started this morning off by calling 3 of them. We’ll see how the process goes and keep you updated on our progress and any bumps in the road. We figure lots of folks are contemplating this right now, or going through it themselves, so we might as well share our experience so others can learn from it. Wish us luck!

A key difference between the hedge fund’s strategy and HAMP seems to be the willingness to reduce the principal owed on the loans. The hedge fund forgives a portion of the principal in 90% of their modifications. Federally regulated banks subject to HAMP, according to the article, are more likely to lower interest rates, give homeowners time to catch up on late payments, and extend the length of the loan. They only forgive a portion of the principal in 2% of their modifications.

Despite the strong case that the article makes for the private market strategy over government involvement, it identifies two critical factors that limit the hedge fund’s effectiveness:

1. Many mortgages have thousands of owners. Because mortgages were packaged into securities for resale, the infamous Residential Mortgage Backed Securities (RMBS) that were part of the credit crisis, it is often impossible to buy (and therefore modify) individual mortgages – they have thousands of owners.

2. Banks don’t want to recognize losses. If a mortgage does have a single owner, like a bank, then that owner has to be willing to sell the loan at a steep discount in order for it to be attractive to the hedge fund. After all, they’re doing this to make money. The strategy banks currently employ of lowering rates and extending the term allows them to push any losses into the future.

In the end there is no suggested way forward, though presumably the author would hold up the private market model as the ideal. Reports from the government itself seem to show that the Federal programs are not working for everyone either. For many homeowners, the end result is likely to be foreclosure unless the economy and housing markets bounce back quickly.

Check out the full article for an interesting story, and by all accounts a successful mortgage modification strategy for certain homeowners.