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Ask A Lender: Chad Lubben, Senior Vice President, Guaranteed Rate

by Chicago Agent

Q: Why is good economic news typically bad for mortgage rates and bad economic news good for rates?   

A:  Many real estate professionals, borrowers, attorneys and even loan officers believe there is a direct relationship between the Federal Reserve and interest rates. However, stocks and bonds have a greater effect on mortgage rates than the “Fed.” There’s a simple explanation for this. Investors, who are always in search of higher returns, generally avoid holding onto cash; they invest in both stocks and bonds instead. Second, home loan rates are actually based on the performance of mortgage-backed securities (MBS), which are a type of bond.

When we put those two facts together, we can understand the relationship between bad economic news and low home loan rates, and vice versa. When the U.S. economy is doing well and there are good economic reports, investors tend to invest in stocks. Stocks are more risky, but they generally offer higher returns. To do this, investors must remove some of their money from less-risky bonds. This decreased demand in bonds causes bond prices to decline, which in turn causes home loan rates to rise. Inversely, when the economy is poor and reports are negative, investors tend to remove money from higher-risk stocks and put it into bonds, which investors view as less volatile. As the demand for bonds increases, bond pricing improves and then home loan rates decrease.

Q: How does my client qualify for a no-closing-cost loan on a refinance?

A: This all depends on the interest rate a borrower is willing to take and the size of their loan. All banks pay a rebate or credit associated with a particular interest rate. If a borrower is willing to take a higher interest rate, then that will return a higher credit. This credit pays the loan officer and lender, and can also pay the borrower’s closing costs if it is above a certain pricing threshold. If you combine this credit along with the loan size, you’ll get the closing cost credit available.

For example, a $400,000 loan with a 0.5 basis point rebate would provide a $2,000 closing cost credit ($400,000 x .005 = $2,000). This is typically enough to pay the majority of the closing costs within Illinois. The thing to keep in mind with these types of loans is the borrower may not be receiving the best rate. It’s important to look at the break-even point of taking a lower rate and paying the closing costs vs. the higher rate with credit to offset closing costs. It’s important to work with a professional who understands and can advise on where these break-even points will be for each type of loan.

Q: What are points? When should my client pay points?  

Paying points is simply paying a cost, which is a certain percent of the loan amount, to receive a lower interest rate and lower monthly payments. There is no right or wrong answer regarding paying points. It’s always important to look at the break-even point of paying this fee. This is done by taking the cost of the points and dividing into the savings that buyers will receive as a result of paying those points.

At some time in the future, there will be a break-even point and your buyers will be out of the red and into the black from paying this cost. From this calculation, we can determine whether or not it is prudent for you to pay this upfront charge.


chadlubben

Chad Lubben is a senior vice president of mortgage lending at Guaranteed Rate. He and his wife Kristen live in Roscoe Village. lubben joined Guaranteed Rate in October of this year after being a Leaders Club Member of Wells Fargo Home Mortgage for five years.

He has been originating mortgages and has lived in Chicago for more than 10 years. lubben is a condo lending specialist and prides himself on being a professional extension of the real estate professionals with whom he partners. For more information about a new or existing mortgage, contact him directly at 773.654.2031 or online at [email protected] or www.guaranteedrate.com/chadlubben.

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Comments

  • Jack says:

    The Fed has more pull on interest rates than Chad is letting on. The Fed has been artificially manipulating the bond market by creating an artificial demand for bonds from buying US bonds in huge quantities (85 billion a month). The Fed by artificially creating a bond demand has a direct effect on what the interest rates are. Yes rates are directly correlated to the stocks and bonds market but the Bond market has been completely manipulated by the Fed.

  • Chad Lubben says:

    Jack;

    Great point. The Fed can influence interest rates by purchasing mortgage bonds as they have done. They however are another trader (all be it a large one). The buying and selling of mortgage bonds (MBS) is what sets mortgage rates. They can influence interest rates, but can’t set them.

  • Justin Roth /AVP Fifth Third Bank says:

    Great Article Chad! This is good for consumers and realtors to know! Knowledge is power people! This is what I preach everyday to my borrowers and referral partners. Well done!

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