How Does Prime Rate Affect Mortgage Rates?
Question: The prime interest rate has dropped several points since the start of the year. Home mortgage interest rates haven’t dropped as dramatically. Why?
Answer: There is no direct connection between home loan interest rates and the prime rate (supposedly the lowest interest rate at which banks lend to their best customers).
Federal Reserve Chairman Alan Greenspan has led the reduction in the Fed funds discount rate. It can take at least six months for these rate reductions to have any effect on the national economy.
Home loan interest rates are generally tied to the 10-year U.S. Treasury note interest rate. They used to be tied to the 30-year U.S. Treasury bond interest rate, but recently very few 30-year Treasury bonds have been issued.
The theory is that lenders who want to lend money long term can either buy 10-year Treasury notes or get a higher yield by investing in 30-year home loans, which usually pay off in fewer than 10 years.
As you can see, the lending market is disorganized. About all that can be said is that if the Fed funds rate declines, other interest rates will probably decline, but not at the same pace.
Buyer Seeks Recourse for Termite Damage
Q: I bought my home in September 1999. After the closing, I discovered termite damage repairs were not completed by the seller.
I had another termite inspection and filed a complaint with the termite inspection company’s state regulator. The state sent out an inspector who agreed the work was not completed properly.
A year and a half later, I have discovered more termite and dry rot damage that was covered up by the seller. The window sill of my living room picture window has huge holes, which were covered by tape and painted over to conceal the damage.
The same method was used on the back porch to hide rot. The repairs will cost several thousand dollars. Do I have any recourse against my seller?
A: Covering the dry rot with tape and painting over it is strong evidence of fraudulent concealment. But I am surprised the termite inspector you hired didn’t discover it, because the termite inspectors I’ve seen always poke everything with their “ice pick” probe. Maybe the termite structural pest control inspector is liable to you for not discovering that dry rot.
But your question is about the seller’s liability. Your first step should be to get one or more written repair estimates from licensed contractors.
Then send a demand letter to the seller requesting payment within 30 days for the fraudulent concealment. If you don’t receive payment, head to small claims court, where the judge can decide if the seller owes you money.
Fraudulent concealment is especially interesting because the statute of limitations begins to run when you discover the fraud. Because you recently discovered the fraud, the statute of limitations is not a valid defense for the seller. However, your big legal hurdle will be proving the seller knew of the dry rot defect and failed to disclose it to you.
High Adjustable Rate? Look Into Fixed Rate
Q: When we moved to the United States from Europe a few years ago, we were fortunate to obtain an adjustable rate mortgage (ARM) to buy a house. It adjusts every year.
I was surprised to learn that effective Oct. 1, 2001, our new ARM interest rate is 7%. Looking at our ARM contract, our interest rate is based on the “current index” of an average 12-month yield. Is this the normal way to calculate the ARM interest rate? I was expecting to see a lower ARM interest rate at this adjustment.
When I contacted our lender, I was told we have the highest FICO credit score. But the lender refuses to reduce our interest rate. What should we do?
A: Adjustable rate mortgage interest rates are the combination of an “index,” such as the cost of funds, 12-month Treasury bills, LIBOR (London Inter Bank Offering Rate), or several other indexes, plus a “margin.”
For example, if your margin is 2% above your index that is now 4, your interest rate would be 6%.
Your 7% ARM is very expensive. You could get a lower interest rate by refinancing with a fixed-rate mortgage. If you plan to keep your home for many years, refinancing to a fixed-rate mortgage would be smart.
Another alternative is to refinance with a five-year ARM, around 5% as I write this. That means your interest rate would be 5% for five years. After that, the mortgage becomes a true ARM, with an interest rate that changes periodically, based on the index plus the margin.
Although your 7% ARM is not a bad deal, you can do better by refinancing with either a fixed-rate mortgage or an ARM that is locked in for five years around 5% interest.
If your current lender won’t give you a good deal, shop around because lots of lenders want your business if you have an excellent FICO credit score of 700 or above.
Hire Real Estate Attorney for Limited Transaction
Q: How can an owner sell a property to a close relative without assistance from a Realtor?
A: One solution is to hire an experienced real estate attorney to handle the transaction. Be sure to get a fee quotation in advance so you won’t have any surprises.
To find a good local real estate attorney, phone a nearby association of Realtors to ask for the name of their attorney. He or she is probably an excellent real estate attorney.
If that attorney is too busy, however, ask for recommendations of one or two other local real estate attorneys who can handle your simple transaction.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010, or visit https://www.bobbruss.com. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.
