Before paying down your mortgage balance with extra principal payments, be sure to plan carefully.

The biggest risk in lending for banks is that you will suddenly stop paying your mortgage.  In that event, the banks hope that you owe them as little as possible against the value of the home. 

That way, your mortgage balance is covered in full and paid off in a discounted sale via foreclosure.

The fear of foreclosure is why lenders are eager to take your dollars and to help you increase your equity position through bi-weekly payments and other systems. 

When banks encourage you to pay down your principal balance, their hope is that you will voluntarily decrease their risk in lending to you.

Important to remember, though: your interest rate is determined by the risk that you represent to the bank.  When you pay down your mortgage balance with extra principal payments, your risk to the bank decreases. 

However, do you think that the bank will call you to offer you better interest rates now that your risk is lower?

Therefore, before paying extra principal dollars, consider some of your alternatives first:

• Save for college
• Establish an emergency fund
• Fund a retirement plan
• Invest in stocks or bonds
• Pay down credit card debt
• Pay down installment loans

There are many more options, of course, but just remember that you have choices.  Once you give the money to the bank on your first lien, you can’t get it back without a refinance.

As expected, the holiday-shortened week led to extreme volatility in mortgage rates, led by better-than-expected job growth and rising wages for workers. 

In conjunction, these two data points lead to increased consumer spending and the prospect of higher spending pushes the economic slowdown likelihood lower. 

That’s bad news for mortgage rate shoppers because without a slowdown, mortgage rates are unlikely to make a dramatic decline like they did at this time last year.

There’s not much data this week except for Retail Sales on Friday.  You can bet that markets will keep a close eye on this one; it’s a terrific report to gauge whether Americans are spending more dollars (as expected) or not. 

The Retail Sales report will be backed up with the University of Michigan Consumer Confidence survey.  The survey asks random sets of Americans how they feel about the economy and is used by markets to predict spending patterns in the months ahead.

So, big focus this week on spending as it pertains to economic growth.  More spending and high confidence will push mortgage rates higher.

(Image courtesy: The Wall Street Journal Online)

On a stronger-than-expected jobs report and upward revisions to April and May’s figures, mortgage rates are moving higher this morning.

Against an expectation of 120,000, the Bureau of Labor and Statistics reported that 132,000 new jobs were created in June.  This not a huge deal in and of itself. 

It’s the revisions that are causing markets to move today.

Revisions are a normal part of government data.  They occur because the government bureaus cannot survey every business in the country prior to get an exact figure. 

The government, therefore, talks to a small subset of business and then projects that data across the whole economy using sophisticated statistical analysis tools.

The Non-Farm Payrolls report, for example, is usually released on the first Friday of a month — hardly enough time to get a comprehensive look at jobs data country-wide. 

This is one of the reasons why the BLS also released data for April (+ 42,000 jobs) and May (+ 33,000) — it’s had more time to pin down the actual number after the original “estimate”.

It’s the revisions that are mostly to blame for higher rates today.  Overall expectations were beat by 87,000.

Mortgage markets are making like last night’s fireworks, exploding in the sky with a bang.

There are three main factors pushing rates higher today:

1. Bank of England raised their interest rates by 0.25% and foreshadowed future increases
2. European Central Bank Chairman Jean-Claude Trichet said that inflation is “likely to rise again significantly towards the end of the year”.
3. The ADP National Employment Report showed 150,000 new jobs created in June, putting pressure on traders siding with the economists’ predictions of 120,000 new jobs created.

Trading volume is still light and that makes rates more volatile than usual.  Tomorrow’s government jobs report has the potential to really shake up the markets — for good or for bad.

The mortgage markets officially enter “Wait-and-See” mode beginning today as the Federal Open Market Committee begins their two-day meeting.

The importance of the FOMC’s meeting to mortgage markets is all in the words of the committee as opposed to their actions (or lack thereof). 

After all, the group has not “done anything” in a year and yet markets always consider its meetings to be a highly-anticipated event.

What will the FOMC say about inflation, the economy, and the outlook for the future?  This is what impacts the mortgage markets more than anything else.

If the Fed is fearful of inflation, mortgage rates will go up because the dollar is expected to lose value.  That dimishes the value of mortgage bonds to foreign investors.

If the Fed is satisfied that the economy is exhibiting controlled growth, mortgage rates will come down, by contrast.

Right now, markets are anticipating a bullish view on inflation from the Fed and that is one of the reasons why mortgage rates increased so dramatically since March. 

It will be looking for further clues at 2:15 P.M. ET Thursday afternoon.

From the CBS News Video Web site, an interesting story for anyone who’s recently applied for credit.

Credit repositories now sell the contact information of people applying for new mortgage loans to other mortgage lenders that want to compete for the business.

Called “trigger leads”, an unsuspecting mortgage applicant can have his credit checked by a mortgage lender, and then discover that the credit bureaus have sold the rights to his personal information to countless other credit firms across the country.

Because trigger leads identify a person making a lending decision right now, one marketer of trigger leads calls them “the best leads in the business”. It’s no wonder that the credit bureaus are marketing them, and that some lenders are salivating over them.

As the family in the CBS video learned, though, it’s difficult to make the phone stop ringing.  Some of the calls bordered on harassment.

For consumers, there is a very low-tech opt-out Web site called http://www.optoutprescreen.com that is sponsored by the three major credit bureaus (and are also the ones that sell trigger leads).  You can opt out for five years, or submit a form by mail to opt out forever.

Watch the video and then go protect yourself.

(Image courtesy: CBS News Video)

For the first week in a long while, mortgage rates ended the week better than how they started. 

As we talked about last week, when there are no major data releases, the markets tend to move on momentum and psychology.  That’s precisely what pushed mortgage rates lower over the past five days.

This week, though, it’s back to reality.

Beginning in March, mortgage markets started to change their bets about the Federal Reserve’s next steps with the Fed Funds Rate.  Previously, investors believed that the Fed would lower the FFR in the first half of 2007, signaling a tamer inflation outlook in the economy.

Data didn’t support that view, though. 

Then, at the Fed’s May meeting, the tide really turned as the nation’s monetary policymakers noted how housing was cooling off, but that the economy was roaring ahead despite that. 

And that’s right around when the bond market started to take it on the chin.

Well, the Federal Open Market Committee meets again this week for a two-day meeting, adjourning Thursday.  The markets will be closely watching every word from Ben Bernanke & Co. to see if the new bets they’ve made on the economy and inflation will be backed up by the Central Bank.

The Fed drops their press release at 2:15 P.M. ET Thursday.

Until Thursday, watch for small movements in mortgage bonds in response to Monday and Tuesday’s housing data, and Thursday jobless claims statistics.

Is “news” always news, or is it masked opinion? 

When doing research on mortgages, it’s important to pay attention to the objectivity of your research source. 

Often, a writer will deploy key adjectives, phrases, and/or images that distort an otherwise factual story.

This cartoon from clangnuts.com is a terrific example. 

It implies that interest only home loans are for people that can’t otherwise afford homeownership.

The truth is that interest only loans are used by all economic classes of homeowners — not just those that need payment relief. 

Many people choose interest only home loans for their flexibility, or as a financial planning tool.

Sure, there are some people that use interest only loans to “get onto the housing ladder”, but that is a statement about the homeowner and not the mortgage product.

Our opinions are often formed by the words and images we hear in a public forum.  Sometimes, it pays to look a little deeper.

After a tame Consumer Price Index report Friday, mortgage bonds staged a brief rally and rates retreated slightly.

Earlier in the week, mortgage rates were at their highest point in almost a year. 

Unfortunately for rate shoppers, mortgage investors are behaving like Dr. Jekyll and Mr. Hyde right now.  One moment, they hate the outlook on inflation; the next, they love it. 

What’s really confusing is that data points that made mortgage rates move higher or lower 6-9 months ago (i.e. jobs report, crude oil prices, housing stats) are now being discounted. 

Broader data points such as CPI seem to have taken center stage. 

At least for now.

This week, there are virtually no data points of consequence aside from Tuesday’s Housing Starts data.  Given last month’s seasonable weather across the county, don’t be surprised if the number surprises to the hot side.

So, without data, expect mortgage rates to respond to external factors, technical trading factors, and/or irregular weather patterns.

An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing. 

The industry term for the re-calculation is “recasting”.

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month’s mortgage by $2.50, or $30 annually. 

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however.  Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either).  However, within a balanced financial portfolio, they can be a terrific financial planning tool.