If you are waiting for FHA mortgage rates to drop further quit waiting, they can’t for the time being. Feel secure inputting 4.25% in your mortgage calculator estimates for your decisions to purchase a new home or refinance your existing mortgage. Because of the mechanics of the secondary mortgage markets there is no 30 year fixed FHA mortgage rate available lower than 4.25%–the market is at the bottom.
How It Works
After funding your mortgage your lender will almost always package your mortgage with others and sell them on the secondary market. For conventional mortgages the lender sells to Fannie Mae or Freddie Mac, for government mortgages, FHA and VA, the loans are sold to the Government National Mortgage Association, or Ginnie Mae. The Federal Housing Administration, or FHA, is under the Department of Housing and Urban Development, or HUD. FHA is a government organization and does not buy mortgages, but rather insures them. Every FHA mortgage has mortgage insurance, which we explained in a previous post, to offer some protection to lenders should an FHA loan default.
Once loans are sold by lenders to Ginnie Mae they are packaged into bigger pools and offered on the market as Mortgage Backed Securities. Investors who are interested in long term investments that are relatively safe and offer a constant rate of return purchase the securities offered by Ginnie Mae at certain “coupon rates.” The mortgages are sold in lots depending on the interest rate being offered, plus a premium that is paid to the lender for servicing the mortgage, collecting monthly mortgage payments.
As the investors speculate on higher or lower interest rates in the future the prices on the coupon rates available are bid up and down, hence the different prices available to you for an FHA mortgage. Using refinance calculators you can determine your savings by inputting different interest rates depending on a refinance with costs, with no points or with not points or costs.
Bottoming Out
A few factors have converged to create a floor in the current market at 4.25% for FHA 30 year fixed mortgage rates. First, investors feel low rates will continue into the near future. Second, investors are shying away from higher rate mortgages because they are being paid off through refinances to lower rate mortgages. This is creating a skewed pricing model in which higher returns are becoming disproportionately cheaper due to lack of demand than lower returns. Third, Ginnie Mae has no coupons available for investors below those currently being offered.
It is this third point, no available product, or coupons, for investors that sets the interest rate floor for the mortgages. Whereas Fannie Mae and Freddie Mac have available coupons, or investments, in Mortgage Backed Securities, at 4.000% and below, FHA offerings have bottomed out at the current rates. No matter how many points you may be willing to pay to get a lower rate, lenders simply do not have FHA 30 year fixed rate mortgages available below 4.25% at this time. You may get a 15 year mortgage, or a Hybrid ARM, at below 4.25%, but not a FHA 30 year fixed rate mortgage.
What This Means For You
Since investors keep bidding up the prices on Ginnie Mae offerings despite a floor on the interest rate, the value is passed on to you, the mortgage applicant in the form of lower costs. With no where to go on offering lower mortgage rates lenders begin to offer lower fees for the same mortgage rate. Many of the different mortgage calculators available ask for the cost of the mortgage. If rates are dropping but no lower rates are available those costs get lower as the lenders begin to credit back to the borrower funds to cover closing costs and points.
Until Ginnie Mae begins to offer lower coupon rates for investors FHA 30 year fixed rates will be bottomed out at 4.25%. Have you been waiting for the bottom of the market for interest rates? For the time being at least this is what has happened in the FHA mortgage market. Take advantage of this unique market for a mortgage refinance or purchase mortgage using FHA mortgages at a bottom rate and dropping costs.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years’ experience in the mortgage industry.
