Mortgage Rates

Why do mortgage rates seem kind of high? One answer is that in order to fund the rescue and the new government guarantees, our Treasury must sell more new Treasury securities to raise money. And the Treasury has to offer higher interest rates to sell them. On top of that, mortgage related bonds always trade at a slightly higher yield due to the prepayment and delinquency risk. Lastly, the cost of financing mortgages has increased for Freddie and Fannie due to the plan for the FDIC to back the newly issued, unsecured debt of some banks. Obviously by guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields - and to pay for that they'll have to charge borrowers higher interest.

Borrower Classifications

The following is a list of the three different types of borrower classifications and how they are defined:
Owner Occupied:

• Also known as primary residence
• Eligible for homestead exemption
• This is the home where the borrower lives
• Co-borrower can be non-owner occupant, but program restrictions apply
  

Non-Owner Occupied:

• Borrower does not live in this home
• Property can be rented (also known as investment property)
• Sometimes a family member lives in home (son/daughter at college)
• Is not eligible for homestead exemption
• Must do a conventional loan with at least 15-25% down depending on FICO scores
• Difficult to get PMI
• Difficult to obtain 2nd liens
• Must have strong cash reserves remaining after loan closes
• Must count full payment and cannot offset with a new lease
• Rate is higher than owner occupied
• Maximum seller contribution is 2% of sales price

Second Homes:

• Typically in a vacation area
• Property cannot be rented
• Can be purchased if borrower stays in the home on a part-time basis with
  the intent of moving into the home at a later date
• Rate and down payment may be higher that the primary home
• Not eligible for homestead exemption