3 Things You Aren't Hearing in The Media

Posted by on Thursday, February 4th, 2010 at 3:22pm.

mortgage-house-money_200Our media machine in the US has a bizarre and strange habit of confusing the general public with half-truths and bad information.  The main-stream media’s job is simple –  sell advertisements.  They are continually crafting stories to grab at our emotions.  We read and watch and they sell more advertisements.

Below are three gotchas that the media isn’t reporting on today.  These may be serious impediments to your new home purchase or refinance.

Mortgage Rates are going to go up.

As part of Federal stimulus efforts, the U.S. Treasury committed to buy $1.25 Trillion in mortgage securities.  Expert opinions vary, but conservative estimates tie this to approximately 0.5% to 1.0% artificial reduction of retail mortgage rates.  This program ends March 31, 2010.  Without an artificial buyer reducing rates, rates will increase.  If the experts are correct, our market is primed for 6% rates by the start of summer.

Waiting to buy can be expensive.

Everyone wants a great price.  No, we want the lowest price.  But what does that mean when something is financed?  Does it mean the lowest purchase price, or the lowest payment or the least interest?  Take a look below to se what could happen if you wait for price reductions while watching the rate market worsen.  The table below shows the monthly payment of 3 scenarios 1) today’s price at today’s rate, 2) a 5% price reduction with a 0.5% rate increase, and 3) a 10% price reduction with a 1% rate increase.

Description Today’s Price & Rate 5% Price Decline 10% Price Decline
Loan Amount $200,000 $190,000 $180,000
Interest Rate 5.0% 5.5% 6.0%
Monthly Payment $1,074 $1,078 $1,079
5-year Interest Cost $48,076 $50,403 $54,249

The hidden costs of the changing credit market.

The media loves reporting on tightened credit policies.  What they seem to miss is the real cost of the changing credit markets.  This can get a little detailed and boring, but the basics are simple.  As more home owners defaulted on their mortgage, creditors began to tighten credit policies and make riskier credit more expensive.  Below is a list of real examples that have changed over the past 12-24 months:

  • FHA Minimum FICO requirement raised from 580 to 620 to 640 – cost = lost opportunity
  • FHA going from 1.75% upfront fee to 2.25% as of April, 2010 – cost = 0.5% of each loan
  • Monthly PMI premiums are headed up again by as much as 30%
  • Conventional loans with FICO scores under 740 now cost 0.25% (720 to 740) to 3.0% more (FICO from 620 to 639) in discount points at closing

If you know the current cost of your credit, chances are it will cost more in the future if your situation does not improve.

I argue the media sell advertisements.  You could argue that I sell mortgages.  The truth is that I sell a product that helps build wealth.  My role is to help you build your wealth and the best strategy has been, and will always include starting sooner rather than later.

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