On January 22, 2008, mortgage rates fell quickly and without warning.  They touched levels not seen in 5 years and then stayed there for a period of 28 hours.

During those 28 hours, homeowners around the country received calls from their mortgage guy. 

The call went something like this:

Mortgage Guy: "Mortgage rates plunged.  You should consider a refinance to lower rates."

Homeowner: "Hey, thanks for calling me!  What are rates?"

Mortgage Guy: "The 30-year fixed is priced at 5.125% with no points.  It hasn't been this low in 5 years."

Homeowner: "Awesome!  Let me think about it -- I'll call you tomorrow with the go-ahead."

When "tomorrow" came, though, the 5.125% wasn't available anymore. 5.125% had become 5.500%.  Markets had already reversed.  And then some.

When those 28 hours were over, the 30-year fixed mortgage had already started a journey that would bring it from 5.125% to 6.375% in less than a month.  This happened because the Fed Funds Rate had just been lowered farther and faster than at any time in history and because the economic stimulus package had just passed.

The combined impact of these economic jumpstarts made markets fearful of long-term inflation and inflation is the enemy of long-term mortgage rates.

That said, there's been a ton of recession talk lately and that is proving to be a positive for the short end of the mortgage rate curve.  The recession fears translate into lower mortgage rates on shorter-term mortgage products like ARMs.

A quick sampler of the bad-news-for-the-economy, good-news-for-ARMs headlines:

• The number of people filing for unemployment is at a 2-year high
• Ben Bernanke says some banks could be in trouble
• The talk of a soft economy is catching up with consumers

Because of headlines like this, ARM interest rates are steadily slipping.  They haven't reached January's levels, but it's close. 

If the trend continues, homeowners may just get a second chance to capture the interest rate savings they missed out on just a few weeks ago.

Consider this your advance notice, folks.  Make like a boy scout and get prepared for a dip should it ever come.

This time, when your mortgage guy calls, be ready for it.

This time, when your target interest rate hits, be ready to grab it.

This time, have a remortgage plan in place and be ready to execute it. 

The best way to be prepared is to talk with your mortgage guy in advance.  Have the talk today, if you have time. 

Give your loan officer permission to grab whatever that certain mortgage rate is for you the moment it becomes available.  He'll just handle it and you won't have to worry about missing the train. 

Now, many Americans don't have mortgage guys because so many loan officers have moved on to other careers.  If you've been orphaned and don't have a personal loan officer, ask a friend for a referral.  Or, drop me an email and I'll be happy to assist.

The mortgage markets wait for no one so when a door opens, be ready to step through.  With some advance planning, the step can be an easier one.

(Images courtesy: Delilah Boyd)

I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey is now available.

Note: the survey only covers conforming loans.  If you are a jumbo, Alt-A, or sub-prime mortgage holder, the survey is not for you.  If that's the case, email or call me and we can talk about the specifics of your situation.

Anyway, on to the group's predictions for the next 30 days:

• 42% of participants predict rates will increase
• 50% of participants predict rates will decrease
• 8% of participants predict rates will remain unchanged

I am predicting that rates will increase over the next 30 days, but that doesn't mean you should necessarily follow my advice when choosing whether to lock a rate, or float it.  My advice may not be appropriate for your individual situation.

From the Bankrate.com survey:

"The party's over -- inflation is back."

On the fence about locking or floating your mortgage rate?  Try this little test to see if your emotional thoughts out-muscle your rational ones.

Private Mortgage Insurance (PMI) came back in vogue in 2007 for a number of reasons, the most widely-known of which was that PMI was suddenly tax-deductible.

But it came with a catch.  Only families earning less than $100,000 could take the full tax deduction.  For everyone else, PMI was same as it ever was.

Quietly, though, a less-well-known mortgage option called "Lender-Paid Mortgage Insurance" is emerging as a popular PMI alternative.

Lender-Paid MI is winning hearts for two major reasons:

1. Tax deductions are available for all income levels, not just under $100,000
2. Lender-Paid Mortgage Insurance is less expensive than a comparable Private Mortgage Insurance program in the near-term

LPMI is nothing new; it just wasn't as popular back when private mortgage insurance was still cheap and home values were leaping year-over-year. 

But the lower monthly carrying cost doesn't mean that Lender-Paid MI is a better choice for every homeowners vis-à-vis Borrower-Paid MI. 

In fact, even though it's more expensive, there are certain cases where Borrower-Paid MI is actually preferred to Lender-Paid MI.  This is because Borrower-Paid MI eventually "ends".

With Borrower-Paid MI, a homeowner makes separate payments each month to the mortgage insurer and is required to do this until his loan-to-value dips below 80% (or whatever LTV the lender requires to remove PMI).

When the loan-to-value gets to the 80% point -- either through principal paydown, home appreciation, or both -- the mortgage insurance payment are no longer required and are eliminated.

To the homeowner, this is a true "cash savings" each month because a former monthly expense is now, well, former.

By contrast, Lender-Paid MI lasts forever.  This is because LPMI is an interest rate adjustment made at the time of closing.  A 6.000% rate becomes 6.250%, for example. 

In exchange for making larger payments, the lender agrees to "insure" the home loan themselves.

The positive part of LPMI being a part of the home loan note rate is that the IRS treats the additional mortgage interest paid from the higher rate as a tax-deductible expense; there is no technical difference between a mortgage with LPMI and one without it.

The negative part is that as the home's LTV falls to 80% or lower, the LPMI-fueled higher interest rate remains.  It doesn't fall off like BPMI. 

The only way that a homeowner can rid himself of LPMI is to remortgage into a new home loan.

In the end, electing between Lender-Paid MI and Borrower-Paid MI is not as simple as just making a payment comparison -- it requires attention to short- and long-term financial goals. 

LPMI tends to be fit short-term planning and BPMI tends to fit long-term planning but there are always exceptions.  This makes choosing between the two more difficult than just finding "the lowest payment".

RealtyTrac released foreclosure data for January 2008 and its report includes a nugget about real estate repossessions.  The full-size version is easier on the eyes.

Breaking out the data state-by-state, we can see that the Pareto Principle holds: 80 percent of the bank repossessions last month came from 20 percent of the states in the union.

One advantage of using interest only loans versus amortizing loans is that it opens the door to more sophisticated financial planning. 

One way in which that's possible is that interest only loan payments are re-calculated each month based on how much money you are currently borrowing. 

The industry term for the re-calculation is "recasting".

For an interest only, the monthly payment is calculated according to the following formula:

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

A $400,000 loan size at 6.000%, therefore, yields a monthly payment of $2,000. 

If an extra principal payment is made on the loan, the new loan payment will reflect a new, lower outstanding loan balance.

Therefore, paying an extra $1,000 to a $400,000 interest only loan at 6.000% reduces next month's mortgage by $5.00. 

Now, before you say, "Wow. Five dollars. Maybe I'll go the movies. By myself.", note that $5 per month is $60 annually and $60 is six percent of $1,000. 

The payment savings per dollar "invested" is exactly equal to the interest rate.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Additional principal payments on amortizing loans shave months from the loan's life, but not its payment.

Car loans work like this -- they take fixed payments until the loan is paid in full.

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

By contrast, interest only loans recast every month. Like a credit card, you only pay interest on what you're actually borrowing.  If you're borrowing less, your payments will be less.

Now, before you go rush to pay down your interest only loan because you're paying more in interest (6.000%) than you're earning in your bank account (2.500%), consider three important variables:

1. The tax deductibility of your mortgage interest
2. The opportunity cost of pulling money from other sources
3. The value of being liquid.

Your financial planner is a good starting point for these conversations before deciding to reduce your mortgage balance.

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.

(Image courtesy: Art.com, National Bank)