Posts Tagged ‘interest rate’

FDIC Insures Principal, Not Interest

October 15, 2010

No one has ever lost a penny on bank deposits insured by the Federal Deposit Insurance Corporation (FDIC), but there is a little-known hazard of having money in a failing bank.

Recently the Maritime Savings Bank (based in West Allis, Wis.) was closed by regulators and taken over by North Shore Bank. Depositors were informed that the interest rates on their CDs had been slashed. For some, that meant the interest on a CD that doesn’t mature until next spring will be paying about 0.5%  instead of the 3.05% they signed up for a couple of years ago.

Many people are unaware that this is typical when the deposits and assets of a failed bank are sold by the FDIC to a strong institution. Although banks and regulators often remind consumers that FDIC-insured deposits are safe, the promised future earnings on a yet-to-mature CD at a failed bank are not guaranteed. (The ability of an acquiring bank to unilaterally cut interest rates applies only to deposits, not loans.)

Consumers are free to withdraw their money without incurring a penalty, but in today’s low-interest environment it may be hard to find higher CD rates. In part, that’s because many banks that get in financial trouble try to attract money by offering CD rates that are better than the local competition.

In a decision stemming from the savings-and-loan crisis in the late 1980s, the federal government allows banks that acquire failed competitors to lower the interest rates. At that time many institutions that were doomed to fail boosted their CD rates in an attempt to bring in more deposits and stay afloat. When they failed anyway, the FDIC was left with a bigger and more-costly mess to clean up.

Reducing the rates on CDs makes the acquisition more affordable for a bank that steps in. It also makes it more likely that the FDIC will be able to find a strong institution willing to take over an insolvent bank.

If you are interested in more details about this story, read the complete article found on jsonline.com.

Jumbo Mortgage Rates Falling

September 17, 2010

(Jason Marsh is a well-respected mortgage broker with Mortgage Services III, LLC in Waukesha, Wisconsin. His firm has been a trusted source for mortgage financing for more than 30 years.)

There has been a change in the jumbo mortgage market. Up until recently jumbo mortgage rates were as much as two percentage points higher than conventional mortgage rates. Last year at this time a conventional mortgage was at about 4.875 percent, whereas a comparable jumbo mortgage was as much as 6.875 to 7.5 percent. Recently that pricing has changed dramatically.

Today you should be able to get a 30-year jumbo mortgage in the 5.5 percent range. Of course rates and terms will vary from funding source to funding source, and it might become somewhat dicey if the new jumbo is replacing a first and second mortgage. A second mortgage is often treated as a cash-out transaction and that may get in the way of getting a jumbo.

The defining difference between a conforming mortgage and a jumbo mortgage is the size of the loan. Fannie Mae and Freddie Mac are the federal government organizations that purchase mortgages from lenders and securitize them so that lenders have more money to issue mortgages with the goal of making mortgages more readily available. Each year, the federal Housing Finance Agency updates the conforming loan limits, which specify the maximum mortgage size that Fannie Mae can purchase from lenders. For 2010, the general mortgage limit is $417,000.

Interest rates on jumbo loans are typically higher than conforming loans because of the risk the lender assumes by issuing the loan, and because the lender has to keep the loan rather than selling it. In addition, jumbo loans are almost exclusively adjustable rate mortgages whereas conforming loans can have either an adjustable rate or a fixed rate.
Lenders have higher standards for jumbo loans. In order to qualify for a jumbo loan, you will need at least a 20 percent down payment, a credit score of 720 or higher, and verified income to prove you can repay the loan.

Jumbo mortgages also have caps on DTI ratios (debt to income ratios) of 45 percent. Your DTI is determined by dividing all of your monthly debt including your mortgage by your income. For example, $4,500 in total monthly debt divided by $10,000 in gross income equals 45 percent . You qualify!

*** Important note regarding income: It is calculated on your gross income and not your net take home pay after taxes.