Suppose you’re way upside down on your mortgage. Can you buy another house at today’s discounted prices, then simply stop payments on the first one and let it go into foreclosure?
Surprisingly, the answer is yes, you can. Of course, you can also go to jail – which shouldn’t be a surprise at all.
The practice, commonly known as “buy and bail” is considered a type of mortgage fraud. Mortgage fraud occurs when a borrower withholds or falsifies information that would likely cause the lender to reject their loan application if the truth were known.
On the surface, it seems like a clever strategy. A homeowner experiences a sharp drop in their home value, leaving them “underwater” on their mortgage, owing more than the property is worth. They decide it makes more sense financially to stop paying the mortgage and give up the house rather than continue paying what is now far more than the home is worth.
Buy and Bail
However, allowing their current home to go into foreclosure means they won’t be able to buy another one anytime soon, probably at least five years. So instead, they buy the new, less-expensive home first, then stop payments on the house with the big mortgage. Their credit still gets ruined, but not before they’re in a new home, perhaps comparable to the old, with a much smaller mortgage
The practice of “buy and bail” emerged as a significant problem for the mortgage industry as housing prices fell drastically in recent years. What often makes it fraudulent is that the homeowner claims to be purchasing the new home as an investment property, or states an intention to rent out the original home, without actually intending to do so. Because the anticipated rental income is stated as part of the new mortgage application, that makes it fraud.
Technically, one might be able to avoid committing fraud by simply admitting to the new lender that you plan to abandon your current residence. But it’s highly unlikely that any lender would approve a loan knowing that you plan to do so. And concealing that fact in itself could be construed as fraud.
Lenders tighten criteria for second home
In response to an increasing incidence of “buy and bail” situations, lenders have tightened up their criteria for making loans to homeowners wishing to purchase a second property. Fannie Mae, which sets the tone for much of the mortgage lending in the U.S., now requires that a borrower seeking to buy a new home before selling their current one must be able to qualify for fully qualify for both payments. Rental income can only be counted if the homeowner has at least a 30 percent equity in the current home, at present market value.
Things get a bit more complicated in cases where there is a couple where only one spouse is listed on the deed and mortgage. In that situation, the other spouse might purchase a new home independently, while the first allows the old home to fall into foreclosure, but this approach is dicey at best. Spouses generally are recognized to have shared property even if both names are not on the deed, so fraud is still a strong possibility here. Tax troubles with the IRS are a distinct possibility as well.
Lenders also are alert to various signs that a borrower may be attempting a buy and bail. These include: being underwater on their present mortgage, seeking to buy a home in the same general area as their current one, planning to rent one home or the other despite having no history as a landlord, and not having a legitimate renter lined up.
Legitimate purchasers having a harder time
Of course, the prevalence of “buy and bail” makes it harder for those who are legitimately moving to purchase a new home before selling their current one. You may need to demonstrate that you are moving to take a new job or be making a significant upgrade from your current home to qualify. If you have less than 30 percent equity in your current home, you may also need to have a reserve equal to six months’ of mortgage payments.
If you find yourself in a situation where you owe far more on your mortgage than your home is now worth and feel that it doesn’t make sense to continue making payments, there are other options besides “buy and bail.” You can give up the home and become a renter. You can seek a short sale, if the lender will approve, that will get you out of the mortgage and allow you to purchase a home again in as little as two years. Or you can seek a loan modification to lower your monthly payments that *might* include an agreement by the lender to write off some of the principal – this does happen in some cases.
Any are better than risking mortgage fraud. Remember, even a foreclosure drops off your credit in sevens years. A felony stays with you for life.
Wednesday, February 10, 2010
What Interest Rates Are You Looking At?
Thinking about taking out a mortgage, but not sure what kind of interest rate you can get? Wouldn’t it be nice if they just had a chart where you could see what you can expect to pay with a certain credit score, down payment and other factors?
Well, they do – almost.
Fannie Mae’s Loan Level Price Adjustment (LLPA) Matrix and Freddie Mac’s Postsettlement Delivery Fee (PDF) matrices come about as close as you can get to a single chart telling you what you can expect to pay on a mortgage. Both detail the additional fees the lenders assess based on the borrower’s credit score, down payment, type of loan, type of property and other factors.
They don’t actually tell you what rate you’ll pay, but you can figure out what additional fees, if any, you’ll have to pay beyond what a "perfect" borrower might. And since the fees are commonly rolled into the interest rate – just the opposite of paying points – it’s a fairly straightforward calculation to see how your interest rate might be affected.
Both the LLPA and PDF break out a lot of possible situations that might cause you to pay more for your mortgage, like a cash-out refinance, high-balance adjustable rate mortgage, mobile home purchase, subordinate financing and the like. But for most borrowers, the primary things they’ll want to focus on, at least initially, are the credit score and loan-to-value matrices, or grids.
These grids list credit scores down the sides, and loan-to-value ratios (which correspond to down payments for purchases or home equity for refinancing) across the top. You find the range your credit score is in, see where that row interests with the column for your loan-to-value ratio, and viola! There’s the fee you need to pay for that combination of credit score and down payment.
For example, if your credit score is in the 700-719 range, you’ll typically pay an additional fee of 0.5 percent of the loan amount, as compared to someone with a higher credit score, according to the LLPA. In the 680-699 range, you’ll pay from 0.5 percent from 1.5 percent more, depending on your loan-to-value ratio. Lower credit scores pay even more; the premium ranges from 1.25 percent to 2.5 percent for credit scores in the 660-679 range.
You can also reduce your costs – borrowers with higher credit scores can actually get a 0.25 percent credit if their loan-to-value ratio is less than 60 percent (40 percent equity or more).
More fees = higher interest rate
Rolling the fees into your interest rate generally means you’ll pay a quarter percent (0.25 percent) more in interest for each full percent of fees. You can also pay the fees separately as a closing cost.
There may be other factors that will cause your rate to differ from that available to other customers using the same lender, but consulting the LLPA or PDF is a good place to start.
You can also seek a nonconforming loan, which are not sold to Fannie or Freddie on the secondary market. However, you may find that rates and fees for these types of loans exceed any savings you’d realize.
Well, they do – almost.
Fannie Mae’s Loan Level Price Adjustment (LLPA) Matrix and Freddie Mac’s Postsettlement Delivery Fee (PDF) matrices come about as close as you can get to a single chart telling you what you can expect to pay on a mortgage. Both detail the additional fees the lenders assess based on the borrower’s credit score, down payment, type of loan, type of property and other factors.
They don’t actually tell you what rate you’ll pay, but you can figure out what additional fees, if any, you’ll have to pay beyond what a "perfect" borrower might. And since the fees are commonly rolled into the interest rate – just the opposite of paying points – it’s a fairly straightforward calculation to see how your interest rate might be affected.
Both the LLPA and PDF break out a lot of possible situations that might cause you to pay more for your mortgage, like a cash-out refinance, high-balance adjustable rate mortgage, mobile home purchase, subordinate financing and the like. But for most borrowers, the primary things they’ll want to focus on, at least initially, are the credit score and loan-to-value matrices, or grids.
These grids list credit scores down the sides, and loan-to-value ratios (which correspond to down payments for purchases or home equity for refinancing) across the top. You find the range your credit score is in, see where that row interests with the column for your loan-to-value ratio, and viola! There’s the fee you need to pay for that combination of credit score and down payment.
For example, if your credit score is in the 700-719 range, you’ll typically pay an additional fee of 0.5 percent of the loan amount, as compared to someone with a higher credit score, according to the LLPA. In the 680-699 range, you’ll pay from 0.5 percent from 1.5 percent more, depending on your loan-to-value ratio. Lower credit scores pay even more; the premium ranges from 1.25 percent to 2.5 percent for credit scores in the 660-679 range.
You can also reduce your costs – borrowers with higher credit scores can actually get a 0.25 percent credit if their loan-to-value ratio is less than 60 percent (40 percent equity or more).
More fees = higher interest rate
Rolling the fees into your interest rate generally means you’ll pay a quarter percent (0.25 percent) more in interest for each full percent of fees. You can also pay the fees separately as a closing cost.
There may be other factors that will cause your rate to differ from that available to other customers using the same lender, but consulting the LLPA or PDF is a good place to start.
You can also seek a nonconforming loan, which are not sold to Fannie or Freddie on the secondary market. However, you may find that rates and fees for these types of loans exceed any savings you’d realize.
"Underwater" Refinance
Owe more on your mortgage than your home is worth? “Underwater” borrowers have an opportunity to refinance their mortgage, but you need to act soon before the program expires.
The government’s Home Affordable Refinance Program (HARP) expires on June 10, 2010. Part of the government’s Making Home Affordable foreclosure prevention initiative, it allows qualified homeowners to refinance their mortgages at up to 125 percent of their homes’ current value.
The program is designed to assist homeowners whose homes have lost value over the past few years and would like to refinance into a more affordable loan. And while June 10 may seem like a long way off, potential delays due to red tape, negotiations with second lien holders and growing demand as the deadline approaches mean that interested homeowners should act quickly.
The program is a potential lifeline for “underwater” homeowners who have an adjustable rate mortgage (ARM) that is scheduled to reset to a higher interest rate or other type of mortgage where the payments will eventually increase. The usual strategy for such borrowers is to refinance before the interest rate or monthly payments increase, but with the sharp drop in home values over the past three years, many will not be able to qualify for a private-lender refinance – which is where the 125 percent Home Affordable Refinance comes in.
To benefit from a Home Affordable Refinance, you don’t have to be facing an imminent increase in your interest rates or monthly payment. Most ARMs, if not refinanced, are designed to gradually reset to an interest rate that’s much higher than market rates. Interest-only and payment-option loans eventually require that the borrower begin repaying principal. All can result in an increase of hundreds dollars in one’s monthly mortgage payment if the mortgage is not refinanced – and for underwater homeowners, the HARP may be their only realistic chance of doing so, baring a miraculous recovery in housing prices over the next few years.
HARP can also be a boon to homeowners with a higher-interest fixed rate loan who want to take advantage of current interest rates as well. To qualify, you need to have a mortgage that is backed by either Fannie Mae or Freddie Mac, the government-supported lenders who are playing key roles in the program, and be current on your mortgage payments.
Second lien can exceed 125 percent
A few important things to clarify. You cannot owe more than 125 percent of your current home value on your first, or primary mortgage. Note that you can still qualify even if your total mortgage debt including a second mortgage, home equity loan or line or credit exceeds 125 percent. However, the holder of your second mortgage or home equity loans must agree to remain in a junior position to the refinanced loan for you to qualify. The time required for such negotiations is a major reason borrowers in such a position should act quickly.
Also, contrary to popular belief, you do not necessarily have to be in financial difficulty to qualify for a HARP refinance. Some participating lenders will not consider homeowners for this program unless they are experiencing financial problems, but others may be more flexible. You do NOT have to refinance with your current lender – you can use any Fannie Mae or Freddie Mac –approved lender participating in the program.
The HARP refinance is the lesser-known counterpart to the Making Home Affordable loan modification program, which has received most of the attention since the program’s inception, and far more applicants. If you can’t obtain a HARP refinance, you may still be able to get a Home Affordable Modification, which may be easier to qualify for, although not offering the same benefits as a refinance. That part of the program is scheduled to continue through Dec. 31, 2012.
The government’s Home Affordable Refinance Program (HARP) expires on June 10, 2010. Part of the government’s Making Home Affordable foreclosure prevention initiative, it allows qualified homeowners to refinance their mortgages at up to 125 percent of their homes’ current value.
The program is designed to assist homeowners whose homes have lost value over the past few years and would like to refinance into a more affordable loan. And while June 10 may seem like a long way off, potential delays due to red tape, negotiations with second lien holders and growing demand as the deadline approaches mean that interested homeowners should act quickly.
The program is a potential lifeline for “underwater” homeowners who have an adjustable rate mortgage (ARM) that is scheduled to reset to a higher interest rate or other type of mortgage where the payments will eventually increase. The usual strategy for such borrowers is to refinance before the interest rate or monthly payments increase, but with the sharp drop in home values over the past three years, many will not be able to qualify for a private-lender refinance – which is where the 125 percent Home Affordable Refinance comes in.
To benefit from a Home Affordable Refinance, you don’t have to be facing an imminent increase in your interest rates or monthly payment. Most ARMs, if not refinanced, are designed to gradually reset to an interest rate that’s much higher than market rates. Interest-only and payment-option loans eventually require that the borrower begin repaying principal. All can result in an increase of hundreds dollars in one’s monthly mortgage payment if the mortgage is not refinanced – and for underwater homeowners, the HARP may be their only realistic chance of doing so, baring a miraculous recovery in housing prices over the next few years.
HARP can also be a boon to homeowners with a higher-interest fixed rate loan who want to take advantage of current interest rates as well. To qualify, you need to have a mortgage that is backed by either Fannie Mae or Freddie Mac, the government-supported lenders who are playing key roles in the program, and be current on your mortgage payments.
Second lien can exceed 125 percent
A few important things to clarify. You cannot owe more than 125 percent of your current home value on your first, or primary mortgage. Note that you can still qualify even if your total mortgage debt including a second mortgage, home equity loan or line or credit exceeds 125 percent. However, the holder of your second mortgage or home equity loans must agree to remain in a junior position to the refinanced loan for you to qualify. The time required for such negotiations is a major reason borrowers in such a position should act quickly.
Also, contrary to popular belief, you do not necessarily have to be in financial difficulty to qualify for a HARP refinance. Some participating lenders will not consider homeowners for this program unless they are experiencing financial problems, but others may be more flexible. You do NOT have to refinance with your current lender – you can use any Fannie Mae or Freddie Mac –approved lender participating in the program.
The HARP refinance is the lesser-known counterpart to the Making Home Affordable loan modification program, which has received most of the attention since the program’s inception, and far more applicants. If you can’t obtain a HARP refinance, you may still be able to get a Home Affordable Modification, which may be easier to qualify for, although not offering the same benefits as a refinance. That part of the program is scheduled to continue through Dec. 31, 2012.
If you Foreclose, When Can You Buy a New Home?
If you give up your current home, how soon can you buy another one? With millions U.S. homeowners “underwater” on their mortgages or even facing foreclosure, it’s a question that many are pondering.
It’s a particularly relevant question for homeowners who may be considering a “voluntary foreclosure;” that is, to simply stop paying the mortgage and give up the home because they owe more than it’s worth. From their perspective, to continue paying a $400,000 mortgage on a home that’s now only worth $250,000, for example, is simply to throw good money after bad.
In fact, it’s an approach that’s even being endorsed by some experts. University of Arizona law professor Brent White argues that so-called “strategic defaults” can potentially save homeowners hundreds of thousands of dollars and are morally no different from a business deciding to cut its losses on a venture.
But regardless of whether a foreclosure is voluntary or not, you still need a place to live. And while being a renter is always a possibility, many will still want to return to home ownership eventually, particularly those who gave up their previous homes as an economic choice, rather than out of necessity.
Five-year wait for Fannie, Freddie mortgages
If you lose your home to foreclosure, voluntary or otherwise, you won’t be able to qualify for a Fannie Mae or Freddie Mac conforming loan for at least five years and perhaps seven. Same for an FHA loan. Because conforming and FHA mortgages account for the great majority of home loans made in this country, particularly in the middle and lower price ranges, that’s a pretty big obstacle to overcome.
Of course, you can always seek a nonconforming mortgage, but those lenders will have their own guidelines for how soon they’ll lend after a foreclosure. They’ll also be likely to demand a hefty down payment and charge a relatively high interest rate.
This is one reason why a short sale or deed-in-lieu of foreclosure may be better strategies than simply allowing your home to go into foreclosure. With a short sale, you can qualify for a Fannie Mae/Freddie Mac-backed mortgage in as little as two years, and three years on a deed-in-lieu. And while both have the same impact on your credit rating as a foreclosure, your credit can begin to recover in as little as two years after any of them. That’s according to the Fair Isaac Corporation, which developed the FICO credit scoring system used by the three major credit rating agencies.
Credit impacts decline after two years
That’s not to say you’ll get a great interest rate after two years, but you can at least get a decent one. Of course, the full effect of a foreclosure, short sale or deed-in-lieu will remain on your credit for seven years, but the impact does begin to tail off significantly after the first two.
As for the effect on your credit score of a foreclosure or short sale, many mortgage advisers say you can expect a drop of 200-300 points, with the biggest drop for those whose credit was previously unblemished. However, much of that decline is due to the accumulation of missed or late payments that precede a foreclosure or late score. Examples provided by Fair Isaac Corp. put the impact of a foreclosure or short sale by themselves at about 100-150 points.
In sum, if you’re faced with the possibility of losing your own, either involuntarily or as a deliberate economic choice, you’re probably better off pursuing a short sale or deed-in-lieu instead of simply allowing the property to fall into foreclosure. The effect on your credit score may be the same, but if you want to get back into home ownership within a relatively short time, either a short sale or deed-in-lieu will provide the quicker route back, provided your lender is agreeable to them.
It’s a particularly relevant question for homeowners who may be considering a “voluntary foreclosure;” that is, to simply stop paying the mortgage and give up the home because they owe more than it’s worth. From their perspective, to continue paying a $400,000 mortgage on a home that’s now only worth $250,000, for example, is simply to throw good money after bad.
In fact, it’s an approach that’s even being endorsed by some experts. University of Arizona law professor Brent White argues that so-called “strategic defaults” can potentially save homeowners hundreds of thousands of dollars and are morally no different from a business deciding to cut its losses on a venture.
But regardless of whether a foreclosure is voluntary or not, you still need a place to live. And while being a renter is always a possibility, many will still want to return to home ownership eventually, particularly those who gave up their previous homes as an economic choice, rather than out of necessity.
Five-year wait for Fannie, Freddie mortgages
If you lose your home to foreclosure, voluntary or otherwise, you won’t be able to qualify for a Fannie Mae or Freddie Mac conforming loan for at least five years and perhaps seven. Same for an FHA loan. Because conforming and FHA mortgages account for the great majority of home loans made in this country, particularly in the middle and lower price ranges, that’s a pretty big obstacle to overcome.
Of course, you can always seek a nonconforming mortgage, but those lenders will have their own guidelines for how soon they’ll lend after a foreclosure. They’ll also be likely to demand a hefty down payment and charge a relatively high interest rate.
This is one reason why a short sale or deed-in-lieu of foreclosure may be better strategies than simply allowing your home to go into foreclosure. With a short sale, you can qualify for a Fannie Mae/Freddie Mac-backed mortgage in as little as two years, and three years on a deed-in-lieu. And while both have the same impact on your credit rating as a foreclosure, your credit can begin to recover in as little as two years after any of them. That’s according to the Fair Isaac Corporation, which developed the FICO credit scoring system used by the three major credit rating agencies.
Credit impacts decline after two years
That’s not to say you’ll get a great interest rate after two years, but you can at least get a decent one. Of course, the full effect of a foreclosure, short sale or deed-in-lieu will remain on your credit for seven years, but the impact does begin to tail off significantly after the first two.
As for the effect on your credit score of a foreclosure or short sale, many mortgage advisers say you can expect a drop of 200-300 points, with the biggest drop for those whose credit was previously unblemished. However, much of that decline is due to the accumulation of missed or late payments that precede a foreclosure or late score. Examples provided by Fair Isaac Corp. put the impact of a foreclosure or short sale by themselves at about 100-150 points.
In sum, if you’re faced with the possibility of losing your own, either involuntarily or as a deliberate economic choice, you’re probably better off pursuing a short sale or deed-in-lieu instead of simply allowing the property to fall into foreclosure. The effect on your credit score may be the same, but if you want to get back into home ownership within a relatively short time, either a short sale or deed-in-lieu will provide the quicker route back, provided your lender is agreeable to them.
The Good and Bad of Debt Consolidation
Are credit card interest rates eating you alive? Tired of juggling multiple debt payments each month? Thinking about just rolling everything into a single bill with a mortgage debt consolidation loan?
Tapping your home equity to pay off other debts can simplify your life and save you a lot of money. But it can also lead to big trouble if you’re not careful.
Here’s the upside. Credit card rates are going through the roof right now, while mortgage rates remain unusually low. Credit card companies have been increasing rates and fees in anticipation of new consumer protection rules, with the result that cardholders who may have been paying 5-7 percent interest may now be paying 14-17 percent or even higher.
By contrast, a home equity line of credit can be had for as little as 5-6 percent, with rates somewhat higher for a home equity loan or cash –out refinance of the entire mortgage. And for most borrowers, the interest is tax deductable. So swapping out your high-cost credit card or other debt for low-cost, tax-deductable mortgage debt can be very attractive.
Now for the downside. Credit card debt is unsecured, while mortgage debt is secured by the value of your home. That is, if you don’t pay your credit card bills, there isn’t a lot they can do to you other than trash your credit rating and subject you to endless phone calls. But they can’t come after your property or wages. But if you fail to make your mortgage payments, they can take your home.
So when you convert credit card or other personal debt to mortgage debt, you’re exchanging an unsecured obligation for a secured one. So you might be saving money, but you could also be putting your home at risk – moving that extra debt onto your mortgage could be the difference between staying current and falling into foreclosure if worst comes to worst.
Reduce high-interest debt
A debt consolidation home equity loan or line of credit can make sense if you have substantial other debts where you can significantly reduce your interest costs by refinancing. For example, if you have $20,000 in credit card debt at 14 percent interest, you’d have to pay $310 a month to pay it all off within 10 years. Converting it to mortgage debt at 6 percent interest would let you pay it off in the same length of time for only $220 a month – a monthly savings of $90. So while the savings are significant, it’s not a magic wand to eliminate debt.
You can often structure a home equity loan or cash-out refinance over a longer term than other debts, taking a debt that amortizes over 10 years and stretching it out over 20-30. This will probably reduce your monthly payments even more than just the savings on interest alone will do, but it will increase your costs over the long run, since you’ll you paying interest for a longer period of time.
Don't forget the fees
Home equity debt consolidations have other wrinkles you need to be aware of as well. A refinance or second mortgage/home equity loan will come with fees that you’ll need to pay and take into account when figuring potential savings. And while a home equity loan typically has few or no fees, the interest rates are typically variable, meaning you could end up paying more than you originally expected.
Probably the biggest problem faced by people who take out debt consolidation loans is that they begin to gradually accumulate new debt once they’ve consolidated their old ones. With the credit card balances at zero, they figure they can easily manage a gas or grocery purchase, a few clothes, maybe a couple airline tickets – and before you know it, their secondary debt is out of control again, only now they have a bigger mortgage payment as well.
There’s a general perception right now that it’s almost impossible to obtain a home equity loan these days, for debt consolidation or any other purpose, due to tight credit restrictions. But while it is considerably more difficult than before, banks are still lending to those who retain sufficient equity in their homes and live in areas where housing prices are relatively stable. The important thing is, don’t just focus on the lower interest rate you can get with a debt consolidation – look at the entire financial picture and make sure it makes sense for you.
Tapping your home equity to pay off other debts can simplify your life and save you a lot of money. But it can also lead to big trouble if you’re not careful.
Here’s the upside. Credit card rates are going through the roof right now, while mortgage rates remain unusually low. Credit card companies have been increasing rates and fees in anticipation of new consumer protection rules, with the result that cardholders who may have been paying 5-7 percent interest may now be paying 14-17 percent or even higher.
By contrast, a home equity line of credit can be had for as little as 5-6 percent, with rates somewhat higher for a home equity loan or cash –out refinance of the entire mortgage. And for most borrowers, the interest is tax deductable. So swapping out your high-cost credit card or other debt for low-cost, tax-deductable mortgage debt can be very attractive.
Now for the downside. Credit card debt is unsecured, while mortgage debt is secured by the value of your home. That is, if you don’t pay your credit card bills, there isn’t a lot they can do to you other than trash your credit rating and subject you to endless phone calls. But they can’t come after your property or wages. But if you fail to make your mortgage payments, they can take your home.
So when you convert credit card or other personal debt to mortgage debt, you’re exchanging an unsecured obligation for a secured one. So you might be saving money, but you could also be putting your home at risk – moving that extra debt onto your mortgage could be the difference between staying current and falling into foreclosure if worst comes to worst.
Reduce high-interest debt
A debt consolidation home equity loan or line of credit can make sense if you have substantial other debts where you can significantly reduce your interest costs by refinancing. For example, if you have $20,000 in credit card debt at 14 percent interest, you’d have to pay $310 a month to pay it all off within 10 years. Converting it to mortgage debt at 6 percent interest would let you pay it off in the same length of time for only $220 a month – a monthly savings of $90. So while the savings are significant, it’s not a magic wand to eliminate debt.
You can often structure a home equity loan or cash-out refinance over a longer term than other debts, taking a debt that amortizes over 10 years and stretching it out over 20-30. This will probably reduce your monthly payments even more than just the savings on interest alone will do, but it will increase your costs over the long run, since you’ll you paying interest for a longer period of time.
Don't forget the fees
Home equity debt consolidations have other wrinkles you need to be aware of as well. A refinance or second mortgage/home equity loan will come with fees that you’ll need to pay and take into account when figuring potential savings. And while a home equity loan typically has few or no fees, the interest rates are typically variable, meaning you could end up paying more than you originally expected.
Probably the biggest problem faced by people who take out debt consolidation loans is that they begin to gradually accumulate new debt once they’ve consolidated their old ones. With the credit card balances at zero, they figure they can easily manage a gas or grocery purchase, a few clothes, maybe a couple airline tickets – and before you know it, their secondary debt is out of control again, only now they have a bigger mortgage payment as well.
There’s a general perception right now that it’s almost impossible to obtain a home equity loan these days, for debt consolidation or any other purpose, due to tight credit restrictions. But while it is considerably more difficult than before, banks are still lending to those who retain sufficient equity in their homes and live in areas where housing prices are relatively stable. The important thing is, don’t just focus on the lower interest rate you can get with a debt consolidation – look at the entire financial picture and make sure it makes sense for you.
Using APR to Compare and Contrast Mortgage Lenders
Shopping for a mortgage can be complicated, with lots of different factors such as interest rates, fees, points and loan terms to take into account. Is there a simple way to compare offers from different lenders that cuts through the confusion and shows which is the best deal?
Actually, there is – almost. The annual percentage rate (APR) on a mortgage loan is designed to help you do just that. Although it’s not foolproof and you sometimes have to consider other factors as well, it is a great tool to help cut through the clutter and figure out what the bottom-line cost of a mortgage will be.
The APR takes all those things that make it hard to figure the cost of a mortgage – the interest rate, lender fees, discount points and loan duration (term) – and rolls them into a single number – the annual percentage rate. This number, which is similar to – and often confused with – the interest rate, shows what your actual cost of borrowing is. By law, the APR must be listed on the Truth-in-Lending statement all mortgage lenders are required to provide.
For example, consider two loans, both for $200,000 at 5 percent interest. Just for the sake of an example, we’ll say the first loan has no fees or points paid, so the borrower is simply borrowing $200,000 at 5 percent interest. On the second loan, however, the borrower is paying $5,000 in fees and points, which are included in the $200,000 balance the borrower owes. So in reality, the borrower is getting a $195,000 loan, with a $5,000 charge added right on top.
The APR takes into account this $5,000 charge in figuring the cost of borrowing $195,000 – the amount actually available for the borrower to use. It does this by spreading the $5,000 over the term of the loan – in this case, we’ll say 30 years – and rolling it into the interest rate. Taking that into account, it means the borrower is effectively paying an annual rate of 5.218 percent to borrow $195,000 over 30 years – even though the actual terms of the loan are $200,000 (including fees) at an annual rate of 5 percent.
Shows true cost of borrowing
That’s essentially how the APR works. It takes any fees you pay for a mortgage loan or refinance, and recalculates their cost as part of an interest rate. It’s a handy way of comparing loan offers with differing fees and interest rates. For example, you may have one loan offer at 5.5 percent, zero points and $2,500 in fees, vs. another at 5.25 percent, two points and $7,000 in fees. Your APR on the first might be 5.6 percent, but 5.75 percent on the second. The first loan is the least expensive, even though it has a higher interest rate.
The APR can be used to compare offers on adjustable rate mortgages, even though the rates may fluctuate over time. The way that works is, the APR is calculated assuming you’ll have the mortgage for the full term of the loan and simply pay the new rate whenever it resets. Because no one can predict what interest rates will do in the future, the calculation simply assumes the base rate, or rate index, that rate resets are based on will remain unchanged, so the calculation simply depends on how much the resets vary from the base rate.
Less accurate for loans held only a few years
The one major problem with relying solely on the APR to compare mortgage offers from different lenders is that it assumes you’ll hold the mortgage for the entire term. Remember, in our example above, the $5,000 in costs was spread over 30 years. However, if you sell the home or refinance before you’ve fully paid off the mortgage, you’ve had less time to amortize the fees – increasing the effective interest rate of the loan.
As a result, the APR tends to favor mortgages with low rates and high fees. If you think you might sell or refinance within 7-10 years, a loan with a higher rate and lower fees might be better. Though the APR can act as a rough guide, to get a definite answer, you’ll need to plug the interest rate, fees and other information in to a mortgage calculator and see how they compare for the length of time you plan to have the home.
Actually, there is – almost. The annual percentage rate (APR) on a mortgage loan is designed to help you do just that. Although it’s not foolproof and you sometimes have to consider other factors as well, it is a great tool to help cut through the clutter and figure out what the bottom-line cost of a mortgage will be.
The APR takes all those things that make it hard to figure the cost of a mortgage – the interest rate, lender fees, discount points and loan duration (term) – and rolls them into a single number – the annual percentage rate. This number, which is similar to – and often confused with – the interest rate, shows what your actual cost of borrowing is. By law, the APR must be listed on the Truth-in-Lending statement all mortgage lenders are required to provide.
For example, consider two loans, both for $200,000 at 5 percent interest. Just for the sake of an example, we’ll say the first loan has no fees or points paid, so the borrower is simply borrowing $200,000 at 5 percent interest. On the second loan, however, the borrower is paying $5,000 in fees and points, which are included in the $200,000 balance the borrower owes. So in reality, the borrower is getting a $195,000 loan, with a $5,000 charge added right on top.
The APR takes into account this $5,000 charge in figuring the cost of borrowing $195,000 – the amount actually available for the borrower to use. It does this by spreading the $5,000 over the term of the loan – in this case, we’ll say 30 years – and rolling it into the interest rate. Taking that into account, it means the borrower is effectively paying an annual rate of 5.218 percent to borrow $195,000 over 30 years – even though the actual terms of the loan are $200,000 (including fees) at an annual rate of 5 percent.
Shows true cost of borrowing
That’s essentially how the APR works. It takes any fees you pay for a mortgage loan or refinance, and recalculates their cost as part of an interest rate. It’s a handy way of comparing loan offers with differing fees and interest rates. For example, you may have one loan offer at 5.5 percent, zero points and $2,500 in fees, vs. another at 5.25 percent, two points and $7,000 in fees. Your APR on the first might be 5.6 percent, but 5.75 percent on the second. The first loan is the least expensive, even though it has a higher interest rate.
The APR can be used to compare offers on adjustable rate mortgages, even though the rates may fluctuate over time. The way that works is, the APR is calculated assuming you’ll have the mortgage for the full term of the loan and simply pay the new rate whenever it resets. Because no one can predict what interest rates will do in the future, the calculation simply assumes the base rate, or rate index, that rate resets are based on will remain unchanged, so the calculation simply depends on how much the resets vary from the base rate.
Less accurate for loans held only a few years
The one major problem with relying solely on the APR to compare mortgage offers from different lenders is that it assumes you’ll hold the mortgage for the entire term. Remember, in our example above, the $5,000 in costs was spread over 30 years. However, if you sell the home or refinance before you’ve fully paid off the mortgage, you’ve had less time to amortize the fees – increasing the effective interest rate of the loan.
As a result, the APR tends to favor mortgages with low rates and high fees. If you think you might sell or refinance within 7-10 years, a loan with a higher rate and lower fees might be better. Though the APR can act as a rough guide, to get a definite answer, you’ll need to plug the interest rate, fees and other information in to a mortgage calculator and see how they compare for the length of time you plan to have the home.
ARMs Still Have Some Merits
Looking to get the best possible interest rate on a home mortgage or mortgage refinance? You might consider an adjustable rate mortgage (ARM). Although ARMs are somewhat out of favor these days, for many borrowers they can still be a sensible, and even the best, choice for their particular circumstances.
ARMs acquired a bad reputation in the collapse of the subprime mortgage market, when they were a major share of the mortgages that defaulted and led to the crisis. As a result, many borrowers now regard them as risky, exotic-type loans full of potential pitfalls to snag the unwary.
The truth is, ARMs are a fairly standard and well-established type of mortgage loan. Unfortunately, many lenders used them as a way to offer credit to marginally qualified borrowers, often coupled with “exotic” variations like interest-only payments, resulting in loans that could not be sustained unless housing prices continued to rise. When prices fell, the loans began to default.
But for well-qualified borrowers with a realistic view of their finances, an adjustable rate mortgage can be a sound decision. Initial rates on ARMs often run about half a percentage point less than comparable 30-year fixed-rate loans – a savings of roughly $75 a month on a $250,000 loan – so the savings can be significant.
You’re not likely to qualify for an ARM or any other mortgage these days if you’re a bad credit risk, and exotic wrinkles such as interest-only or negative amortization payments have all but disappeared. Instead, if you get an adjustable rate mortgage these days it’s likely to be a standard ARM that starts out at a fixed interest rate for a number of years (often 3, 5 or 7 years), then periodically resets to a different rate based on predetermined index, such as Treasury securities or the Cost of Funds Index (COFI).
A sensible choice for some borrowers
For certain groups of borrowers, a standard-type ARM can actually be a better option than a “plain vanilla” fixed-rate mortgage. For example, suppose you only plan to remain in the home for 5-7 years. A 7-year ARM (which is fixed at the initial rate for seven years before resetting) locks you into a lower interest rate for at least seven years, and you can sell the house and pay off the rest before it ever resets.
Another candidate for an ARM is a new home buyer who’s just beginning to establish their credit or suffered a credit setback recently. Such a buyer will have to pay a higher interest rate than a borrower with pristine credit; getting an ARM allows them to minimize their rate for several years while building or rebuilding their credit. Then, when they’re built up their credit, they can refinance at the low rates that are available to prime borrowers.
ARMs are also a good strategy during times when market interest rates are running relatively high and the borrower expects they will fall back down in a few years, when the loan can be refinanced at a lower rate. However, given that rates are relatively low currently, that is not likely to be a strategy one would pursue at this time.
Take the long view
The key thing when taking out an ARM, either for a home purchase or refinance, is to be confident you’ll be able to refinance the loan a few years down the road when it’s time for the rate to reset. Because rates can gradually drift much higher once the initial fixed-rate period is over, you don’t want to stay in the same loan for 30 years or however long the full term is. You want to be confident that both your income and housing prices will remain relatively stable, so that you’ll have equity in the home and be able to qualify for a new loan when the time comes.
ARMs acquired a bad reputation in the collapse of the subprime mortgage market, when they were a major share of the mortgages that defaulted and led to the crisis. As a result, many borrowers now regard them as risky, exotic-type loans full of potential pitfalls to snag the unwary.
The truth is, ARMs are a fairly standard and well-established type of mortgage loan. Unfortunately, many lenders used them as a way to offer credit to marginally qualified borrowers, often coupled with “exotic” variations like interest-only payments, resulting in loans that could not be sustained unless housing prices continued to rise. When prices fell, the loans began to default.
But for well-qualified borrowers with a realistic view of their finances, an adjustable rate mortgage can be a sound decision. Initial rates on ARMs often run about half a percentage point less than comparable 30-year fixed-rate loans – a savings of roughly $75 a month on a $250,000 loan – so the savings can be significant.
You’re not likely to qualify for an ARM or any other mortgage these days if you’re a bad credit risk, and exotic wrinkles such as interest-only or negative amortization payments have all but disappeared. Instead, if you get an adjustable rate mortgage these days it’s likely to be a standard ARM that starts out at a fixed interest rate for a number of years (often 3, 5 or 7 years), then periodically resets to a different rate based on predetermined index, such as Treasury securities or the Cost of Funds Index (COFI).
A sensible choice for some borrowers
For certain groups of borrowers, a standard-type ARM can actually be a better option than a “plain vanilla” fixed-rate mortgage. For example, suppose you only plan to remain in the home for 5-7 years. A 7-year ARM (which is fixed at the initial rate for seven years before resetting) locks you into a lower interest rate for at least seven years, and you can sell the house and pay off the rest before it ever resets.
Another candidate for an ARM is a new home buyer who’s just beginning to establish their credit or suffered a credit setback recently. Such a buyer will have to pay a higher interest rate than a borrower with pristine credit; getting an ARM allows them to minimize their rate for several years while building or rebuilding their credit. Then, when they’re built up their credit, they can refinance at the low rates that are available to prime borrowers.
ARMs are also a good strategy during times when market interest rates are running relatively high and the borrower expects they will fall back down in a few years, when the loan can be refinanced at a lower rate. However, given that rates are relatively low currently, that is not likely to be a strategy one would pursue at this time.
Take the long view
The key thing when taking out an ARM, either for a home purchase or refinance, is to be confident you’ll be able to refinance the loan a few years down the road when it’s time for the rate to reset. Because rates can gradually drift much higher once the initial fixed-rate period is over, you don’t want to stay in the same loan for 30 years or however long the full term is. You want to be confident that both your income and housing prices will remain relatively stable, so that you’ll have equity in the home and be able to qualify for a new loan when the time comes.
Window of Opportunity Closing Soon for Home Buyers
Is time running out to get a great deal on a home? To listen to some accounts, you would think so.
One the one hand, it’s true that several things will happen this April that will add to the cost of buying a home. First, the income tax credits for first-time and repeat homebuyers will expire; the Federal Reserve will cease its purchases of mortgage-backed securities, which have kept interest rates down; and the FHA will increase the insurance premium it charges on mortgages it insures.
At the same time, several other factors still urge caution. It’s never a good idea to rush into a home purchase, regardless of the financial incentives. Also, there are indications that housing prices in many areas may continue to weaken through 2010, potentially cancelling out the effects mentioned above. Finally, persons with less-than-perfect credit or limited finances may actually be better off waiting a year or two, rather than try to jam a purchase through right now and pay a premium to do so.
The $8,000 first-time homebuyer and $6,500 repeat homebuyer tax credits can only be taken on homes for which sales contracts are signed by April 30, though buyers have until June 30 to actually close the sale. Congress already extended and expanded the credit after it was originally due to expire last November; there doesn’t seem to be much support for extending it again, so if you miss the April 30 deadline, you’re probably out a luck on this one.
A potentially bigger impact will occur on when the Fed buys the last of $1.25 trillion in mortgage securities it has been purchasing over the past year. Also scheduled to conclude on April 30, the program has been credited for driving mortgage interest rates to record lows in the spring and again in the fall of 2009, and keeping them at or below 5 percent for most of the year.
Though 30-year fixed rates held steady around 5 percent through Jan. 2010, most observers expect them to rise sharply once the Fed purchase program concludes. Many observers expect rates to almost immediately shoot up to 6 percent and hold there, an increase of a full percent. On a $250,000 30-year loan, that 1 percent translates to an additional $150 a month, or $1,800 a year.
Finally, in early April the FHA is increasing the mortgage insurance premium it charges on all loans by half a percent, from 1.75 percent to 2.25 percent. A onetime fee charged upfront at the time of closing, it means that the premium on a $150,000 FHA loan would increase by $750, to $3,375. However, this only applies only to borrowers seeking an FHA-backed loan, although those are making up a larger share of the market.
Reasons to wait
Clearly, if you’re in a position to buy now, go ahead and do so. But that doesn’t mean you’re out of luck if you miss the April deadlines. As mentioned above, even though housing prices appear to be bottoming out nationally, many areas still remain soft. With another glut of foreclosures due to come on the market, some areas could see prices decline another 5-10 percent in 2010, which would help make up for missing out on the current low rates and tax credits.
It also might make sense to wait if you don’t have a great credit score or if you can’t come up with 20 percent down payment. Many lenders these days want to see a credit score of at least 720 to approve a mortgage. Lower scores can still be approved, but will pay a premium to do so. The combination of a low credit score and small down payment could end up adding 1-1 ½ percent onto your interest rate. Also, if you can’t come up with at least a 20 percent down payment, you’ll need to pay for private mortgage insurance, the cost of which is roughly equal to another half a percent in interest. So even if average rates go up, you might be better off waiting a year or two to improve your credit and save up a down payment, so that you can qualify for a prime rate.
Finally, a home is a huge investment – for most people, the biggest they’ll ever make. It’s not something you want to rush into unprepared, regardless of the financial incentives. If you can’t find the home you want in a neighborhood you like, or if buying a home right now is going to put you under a heavy financial strain, you might be better waiting. Saving a few thousand dollars isn’t worth it if you end up in a home that isn’t right for you.
One the one hand, it’s true that several things will happen this April that will add to the cost of buying a home. First, the income tax credits for first-time and repeat homebuyers will expire; the Federal Reserve will cease its purchases of mortgage-backed securities, which have kept interest rates down; and the FHA will increase the insurance premium it charges on mortgages it insures.
At the same time, several other factors still urge caution. It’s never a good idea to rush into a home purchase, regardless of the financial incentives. Also, there are indications that housing prices in many areas may continue to weaken through 2010, potentially cancelling out the effects mentioned above. Finally, persons with less-than-perfect credit or limited finances may actually be better off waiting a year or two, rather than try to jam a purchase through right now and pay a premium to do so.
The $8,000 first-time homebuyer and $6,500 repeat homebuyer tax credits can only be taken on homes for which sales contracts are signed by April 30, though buyers have until June 30 to actually close the sale. Congress already extended and expanded the credit after it was originally due to expire last November; there doesn’t seem to be much support for extending it again, so if you miss the April 30 deadline, you’re probably out a luck on this one.
A potentially bigger impact will occur on when the Fed buys the last of $1.25 trillion in mortgage securities it has been purchasing over the past year. Also scheduled to conclude on April 30, the program has been credited for driving mortgage interest rates to record lows in the spring and again in the fall of 2009, and keeping them at or below 5 percent for most of the year.
Though 30-year fixed rates held steady around 5 percent through Jan. 2010, most observers expect them to rise sharply once the Fed purchase program concludes. Many observers expect rates to almost immediately shoot up to 6 percent and hold there, an increase of a full percent. On a $250,000 30-year loan, that 1 percent translates to an additional $150 a month, or $1,800 a year.
Finally, in early April the FHA is increasing the mortgage insurance premium it charges on all loans by half a percent, from 1.75 percent to 2.25 percent. A onetime fee charged upfront at the time of closing, it means that the premium on a $150,000 FHA loan would increase by $750, to $3,375. However, this only applies only to borrowers seeking an FHA-backed loan, although those are making up a larger share of the market.
Reasons to wait
Clearly, if you’re in a position to buy now, go ahead and do so. But that doesn’t mean you’re out of luck if you miss the April deadlines. As mentioned above, even though housing prices appear to be bottoming out nationally, many areas still remain soft. With another glut of foreclosures due to come on the market, some areas could see prices decline another 5-10 percent in 2010, which would help make up for missing out on the current low rates and tax credits.
It also might make sense to wait if you don’t have a great credit score or if you can’t come up with 20 percent down payment. Many lenders these days want to see a credit score of at least 720 to approve a mortgage. Lower scores can still be approved, but will pay a premium to do so. The combination of a low credit score and small down payment could end up adding 1-1 ½ percent onto your interest rate. Also, if you can’t come up with at least a 20 percent down payment, you’ll need to pay for private mortgage insurance, the cost of which is roughly equal to another half a percent in interest. So even if average rates go up, you might be better off waiting a year or two to improve your credit and save up a down payment, so that you can qualify for a prime rate.
Finally, a home is a huge investment – for most people, the biggest they’ll ever make. It’s not something you want to rush into unprepared, regardless of the financial incentives. If you can’t find the home you want in a neighborhood you like, or if buying a home right now is going to put you under a heavy financial strain, you might be better waiting. Saving a few thousand dollars isn’t worth it if you end up in a home that isn’t right for you.
Cash-in Refinance?
Here’s something you may not have considered if you’re looking to refinance your mortgage – a cash-in refinance.
A cash-in refinance is exactly what it sounds like. Instead of borrowing against your home equity as you would in a cash-out refinance, you’re bringing additional money to the table to pay down your loan principal. And it’s the hot new trend in mortgage refinancing.
Cash-in refinancing was nearly unheard of a few years ago. With real estate values soaring, cash-out refinancing was king, with homeowners borrowing against the seemingly endless growth of their home equity. So when housing prices declined, perhaps it shouldn’t be too surprising that cash-in refinancing would grow more popular as well.
In fact, cash-in transactions made up one-third of all mortgage refinances in the fourth quarter of 2009, according to Freddie Mac, exceeding the 27 percent that were cash-out refinances. By comparison, in the middle of 2006, nearly 90 percent of refinances were cash-out transactions, compared to only 5 percent cash-ins.
Cash-in refinancing offers several advantages that make it worth considering, particularly at a time when banks have tightened their lending standards. First, it makes it easier to qualify for a refinance – if your home has lost value and perhaps is even “underwater” (you owe more than the property is worth), bringing additional cash to the table can improve your equity position.
Increasing your equity in the property can help you qualify for a better mortgage rate, particularly if you currently have less than 20 percent equity in your home. Many lenders boost the rates they charge as your equity declines. In addition, boosting your equity above 20 percent eliminates the need for private mortgage insurance (PMI) on the refinance. This is roughly equal to saving about half a percent on your interest rate, since PMI typically charges about half a percent of your mortgage balance per year.
Putting up additional cash can also bring you back “above water” and make it easier to qualify for a refinance in the first place. Even if you can’t get back to positive equity, putting up a bit of cash might bring you within the range of 125 percent refinance available through the government’s Making Home Affordable Program, particularly if you’re presently stuck at a high rate or in an adjustable rate mortgage about to reset to less favorable terms.
A better return on your money
Another reason to think about a cash-in refinance is as an investment. Consider: if you’re only earning 1-3 percent on a certificate of deposit (CD) or savings account, you can probably get a better return putting that money toward your mortgage. If you can refinance your mortgage at a fixed rate of 5.25 percent, any additional money you put in is effectively earning you 5.25 percent interest, since from a profit-and-loss perspective, interest you don’t pay is the same as interest earned. In fact, you’ll earn even more, considering that mortgage interest is usually tax deductable.
A word of caution, though. The above assumes that home values will remain stable or eventually rise. Should home values continue to decline, putting more money in your mortgage could mean you’re throwing good money after bad. But if your home’s value is the same or higher than it is now when it eventually comes time to sell, you’ll come out ahead.
A cash-in refinance is exactly what it sounds like. Instead of borrowing against your home equity as you would in a cash-out refinance, you’re bringing additional money to the table to pay down your loan principal. And it’s the hot new trend in mortgage refinancing.
Cash-in refinancing was nearly unheard of a few years ago. With real estate values soaring, cash-out refinancing was king, with homeowners borrowing against the seemingly endless growth of their home equity. So when housing prices declined, perhaps it shouldn’t be too surprising that cash-in refinancing would grow more popular as well.
In fact, cash-in transactions made up one-third of all mortgage refinances in the fourth quarter of 2009, according to Freddie Mac, exceeding the 27 percent that were cash-out refinances. By comparison, in the middle of 2006, nearly 90 percent of refinances were cash-out transactions, compared to only 5 percent cash-ins.
Cash-in refinancing offers several advantages that make it worth considering, particularly at a time when banks have tightened their lending standards. First, it makes it easier to qualify for a refinance – if your home has lost value and perhaps is even “underwater” (you owe more than the property is worth), bringing additional cash to the table can improve your equity position.
Increasing your equity in the property can help you qualify for a better mortgage rate, particularly if you currently have less than 20 percent equity in your home. Many lenders boost the rates they charge as your equity declines. In addition, boosting your equity above 20 percent eliminates the need for private mortgage insurance (PMI) on the refinance. This is roughly equal to saving about half a percent on your interest rate, since PMI typically charges about half a percent of your mortgage balance per year.
Putting up additional cash can also bring you back “above water” and make it easier to qualify for a refinance in the first place. Even if you can’t get back to positive equity, putting up a bit of cash might bring you within the range of 125 percent refinance available through the government’s Making Home Affordable Program, particularly if you’re presently stuck at a high rate or in an adjustable rate mortgage about to reset to less favorable terms.
A better return on your money
Another reason to think about a cash-in refinance is as an investment. Consider: if you’re only earning 1-3 percent on a certificate of deposit (CD) or savings account, you can probably get a better return putting that money toward your mortgage. If you can refinance your mortgage at a fixed rate of 5.25 percent, any additional money you put in is effectively earning you 5.25 percent interest, since from a profit-and-loss perspective, interest you don’t pay is the same as interest earned. In fact, you’ll earn even more, considering that mortgage interest is usually tax deductable.
A word of caution, though. The above assumes that home values will remain stable or eventually rise. Should home values continue to decline, putting more money in your mortgage could mean you’re throwing good money after bad. But if your home’s value is the same or higher than it is now when it eventually comes time to sell, you’ll come out ahead.
Monday, February 1, 2010
Home Loans on the Cheap
If you can't afford to buy a new home because of a lack of down payment or insufficient monthly income, you do have one thing in your favor. Lenders are just as eager to generate loans as you are to move into a new home. As a result, they often create flexible, innovative ways to create new homeowners.
Analyze your budget. If you have a low monthly cash flow, a typical mortgage payment may seem unrealistic. In this case, you need to carefully analyze your finances and find out exactly how much you can actually afford to spend on a monthly basis. Then try cutting expenses to free up cash.
Find loans with low monthly payments. Now that you've established what you can comfortably pay, you can begin the process of shopping for loans. To get an affordable monthly payment, you should look for mortgage loans with the lowest interest rates and longest terms. Check the Internet for pricing, and call local lenders. One possible option is to pay "points" on your mortgage to buy-down your interest rates. A point is 1 percent of your loan's overall amount, and you can use it to buy a lower rate- and subsequently a lower payment.
Home mortgage options
If you don't have much money for monthly payments or a down payment, there are lending options:
Interest-only mortgage: For this loan, your payments during an introductory period (typically the first five to seven years) are low and applied directly to your interest. Eventually, your monthly payment amounts will increase and be applied to principal. Be careful with these types of loans, however. Some are structured as "balloon" mortgages, in which the entire payment is due after those first years of interest-only payments. Make sure that you understand the specifics before you sign on the dotted line.
Piggyback loans: For borrowers who can't afford to make a down payment, there are lenders who provide "piggy-back loans," or 80-10-10 financing. For these loans, 80 percent of the loan is borrowed on a first mortgage, followed by 10 percent borrowed on a second mortgage with a higher rate. You would provide the remaining 10 percent down. There are lenders who will even provide 80-15-5 financing, and some even 80-20-0 loans. Shop around, but don't be surprised at the high interest rates on those second mortgages.
As you can see, there are plenty of innovative ways to buy that house. The American Dream can become a reality with some good old-fashioned American ingenuity involving smart budgeting and the right loan package.
Analyze your budget. If you have a low monthly cash flow, a typical mortgage payment may seem unrealistic. In this case, you need to carefully analyze your finances and find out exactly how much you can actually afford to spend on a monthly basis. Then try cutting expenses to free up cash.
Find loans with low monthly payments. Now that you've established what you can comfortably pay, you can begin the process of shopping for loans. To get an affordable monthly payment, you should look for mortgage loans with the lowest interest rates and longest terms. Check the Internet for pricing, and call local lenders. One possible option is to pay "points" on your mortgage to buy-down your interest rates. A point is 1 percent of your loan's overall amount, and you can use it to buy a lower rate- and subsequently a lower payment.
Home mortgage options
If you don't have much money for monthly payments or a down payment, there are lending options:
Interest-only mortgage: For this loan, your payments during an introductory period (typically the first five to seven years) are low and applied directly to your interest. Eventually, your monthly payment amounts will increase and be applied to principal. Be careful with these types of loans, however. Some are structured as "balloon" mortgages, in which the entire payment is due after those first years of interest-only payments. Make sure that you understand the specifics before you sign on the dotted line.
Piggyback loans: For borrowers who can't afford to make a down payment, there are lenders who provide "piggy-back loans," or 80-10-10 financing. For these loans, 80 percent of the loan is borrowed on a first mortgage, followed by 10 percent borrowed on a second mortgage with a higher rate. You would provide the remaining 10 percent down. There are lenders who will even provide 80-15-5 financing, and some even 80-20-0 loans. Shop around, but don't be surprised at the high interest rates on those second mortgages.
As you can see, there are plenty of innovative ways to buy that house. The American Dream can become a reality with some good old-fashioned American ingenuity involving smart budgeting and the right loan package.
Home Mortgages for the Long Haul
Longer-term loans have many advantages, including smaller monthly payments. In addition, there's more time for equity appreciation, career advancement, and other potential factors that can contribute to your ability to better manage mortgage payments. Whether a 40- or 45-year mortgage is appropriate for you depends upon factors that need to be individually evaluated before you make a decision.
Home mortgages for high-priced properties
The advantages become more evident when compared to interest-only loans, which are the rage with many buyers in the market for high-priced homes. With interest-only loans, there are no principal payments during the first few years, which results in a big balloon payment. But with a 40- or 45-year loan, the principal shrinks over time and reduces the burden of debt on the homeowner.
Refinancing strategies
One way to get the most leverage out of these long-term loans is to take advantage of the lower monthly payments for the first few years, and then refinance to a more conventional 15- or 30-year loan after you gain more financial stability. In that way, you'll get the low monthly payments in the beginning that are associated with an interest-only loan, but pay down principal along the way. Or, if you plan to sell your home in a short period of time, a longer loan with lower payments still makes it easier for you to make payments while living in the house.
If you plan to stay in your home for the rest of your life, you may fare better with a 30-year loan. Compare, for example, a $300,000 loan at 7 percent interest paid back over 30 years, with the same loan paid back over 45 years. The monthly payment would be approximately $160 less each month for the 45-year mortgage, adding up to out-of-pocket savings of around $2,000 per year. But, the interest paid over the full term would be about a quarter of a million dollars more for the 45-year loan-almost as much as the entire amount of the original loan. Even with the annual savings subtracted from the equation, the longer loan would cost about $150,000 more over the entire life of the loan, making the 30-year option a wiser choice.
Home mortgages for high-priced properties
The advantages become more evident when compared to interest-only loans, which are the rage with many buyers in the market for high-priced homes. With interest-only loans, there are no principal payments during the first few years, which results in a big balloon payment. But with a 40- or 45-year loan, the principal shrinks over time and reduces the burden of debt on the homeowner.
Refinancing strategies
One way to get the most leverage out of these long-term loans is to take advantage of the lower monthly payments for the first few years, and then refinance to a more conventional 15- or 30-year loan after you gain more financial stability. In that way, you'll get the low monthly payments in the beginning that are associated with an interest-only loan, but pay down principal along the way. Or, if you plan to sell your home in a short period of time, a longer loan with lower payments still makes it easier for you to make payments while living in the house.
If you plan to stay in your home for the rest of your life, you may fare better with a 30-year loan. Compare, for example, a $300,000 loan at 7 percent interest paid back over 30 years, with the same loan paid back over 45 years. The monthly payment would be approximately $160 less each month for the 45-year mortgage, adding up to out-of-pocket savings of around $2,000 per year. But, the interest paid over the full term would be about a quarter of a million dollars more for the 45-year loan-almost as much as the entire amount of the original loan. Even with the annual savings subtracted from the equation, the longer loan would cost about $150,000 more over the entire life of the loan, making the 30-year option a wiser choice.
Important: Can You Afford a Mortgage?
Whether you are making a lower income but want to get out of a rental situation, or are solidly middle class but would like to trade up to a larger house and lot, there are many things that you can do that will help you afford a mortgage payment.
Lifelong Renter, First Time Buyer
Most of us understand that rent money is money down the drain. The money that you pay in rent provides you with a home, but no matter how long you pay rent it will never be your home. Buying a home allows you to make that monthly payment an investment in your future, as well as providing you with a place to live.
Finding an affordable home is not usually the problem for these people. In fact, many times your mortgage payment may be the same as, or not much more than, your rent. The problem is saving up for a down payment while at the same time making those rental payments. Too often, by the time rent, utilities, and necessities are paid for, there is nothing left to save.
There are three things that you can do that can help get you into a home. Try using one, two, or all three to help you meet your goal.
1. Take a part-time job, temporarily. Of course, if you are a single parent, or have other obligations at home, this may not be feasible. If you can manage it, and take that second paycheck and put it straight into a savings account and do not touch it, you would be surprised at how quickly it adds up.
2. Guard your creditworthiness. If you have any delinquent accounts, get them caught up, and then work toward paying any debt off. This can take a great deal of self discipline, but even if you only have an extra $20 a month to pay on an account, do it.
3. Look into state and federal programs. Whether you are a veteran, a first-time homebuyer, a single parent on a limited income, or looking to buy a home in an unpopular neighborhood, there is likely to be a program that can help. These programs may allow you to buy with little or no down payment, a low interest rate, or offer other advantages that bring home buying within your grasp. Try contacting a realtor or mortgage lender to get additional information on these programs.
Moving into a Pricier Neighborhood
Many people buy a home soon after marriage, but after the birth of a child, a promotion, and/or other lifestyle changes, buyers often find themselves ready to move into a larger, more expensive home. Being able to afford the mortgage on one of these homes is always a concern, but you do have some advantages. The longer that you have lived in your current home, the more you have paid down the principal. When your current home sells, you pay off your existing loan, and then should have a pretty substantial amount of money for your down payment.
Another advantage that you have is your existing relationship with your lender. If you have always made timely payments, and are not looking at homes at the top of your price range, your mortgage lender will probably feel comfortable enough with your history that you benefit from lower interest rates, fewer points, or even a smaller required down payment.
Whether you are a first time buyer, or looking to move up in homes, affording a mortgage is a very doable goal. By seeing the numbers in black and white, and knowing your financial situation, you can eliminate much of the fear that holds some back from buying a home.
Lifelong Renter, First Time Buyer
Most of us understand that rent money is money down the drain. The money that you pay in rent provides you with a home, but no matter how long you pay rent it will never be your home. Buying a home allows you to make that monthly payment an investment in your future, as well as providing you with a place to live.
Finding an affordable home is not usually the problem for these people. In fact, many times your mortgage payment may be the same as, or not much more than, your rent. The problem is saving up for a down payment while at the same time making those rental payments. Too often, by the time rent, utilities, and necessities are paid for, there is nothing left to save.
There are three things that you can do that can help get you into a home. Try using one, two, or all three to help you meet your goal.
1. Take a part-time job, temporarily. Of course, if you are a single parent, or have other obligations at home, this may not be feasible. If you can manage it, and take that second paycheck and put it straight into a savings account and do not touch it, you would be surprised at how quickly it adds up.
2. Guard your creditworthiness. If you have any delinquent accounts, get them caught up, and then work toward paying any debt off. This can take a great deal of self discipline, but even if you only have an extra $20 a month to pay on an account, do it.
3. Look into state and federal programs. Whether you are a veteran, a first-time homebuyer, a single parent on a limited income, or looking to buy a home in an unpopular neighborhood, there is likely to be a program that can help. These programs may allow you to buy with little or no down payment, a low interest rate, or offer other advantages that bring home buying within your grasp. Try contacting a realtor or mortgage lender to get additional information on these programs.
Moving into a Pricier Neighborhood
Many people buy a home soon after marriage, but after the birth of a child, a promotion, and/or other lifestyle changes, buyers often find themselves ready to move into a larger, more expensive home. Being able to afford the mortgage on one of these homes is always a concern, but you do have some advantages. The longer that you have lived in your current home, the more you have paid down the principal. When your current home sells, you pay off your existing loan, and then should have a pretty substantial amount of money for your down payment.
Another advantage that you have is your existing relationship with your lender. If you have always made timely payments, and are not looking at homes at the top of your price range, your mortgage lender will probably feel comfortable enough with your history that you benefit from lower interest rates, fewer points, or even a smaller required down payment.
Whether you are a first time buyer, or looking to move up in homes, affording a mortgage is a very doable goal. By seeing the numbers in black and white, and knowing your financial situation, you can eliminate much of the fear that holds some back from buying a home.
What's the Best Mortgage Term for You
There are so many decisions to make when shopping for a home mortgage loan. Should you choose a fixed or adjustable rate? Should you pay interest-only for a period of time? How much money should you put down? One of the simpler, but absolutely crucial decisions that will confront you is the choice of term. How long a mortgage is right for you?
While the most popular terms are still 15- or 30-years, you can find a range of variations, including 10-, 20-, 25-, or even 40-year home loans. In order to find the perfect match, ask yourself the following questions:
1. How long do I plan to stay in the house?
2. How much money can I afford to pay for my mortgage each month and still have enough to save for retirement and other important financial matters?
3. How does the pay-off date fit in with my financial goals and dreams?
Advantages of 30-Year Mortgages
Like your father's Oldsmobile, the 30-year mortgage is the granddaddy of home loans. It will have lower monthly payments than a comparable shorter-term loan. As a result, you'll have more disposal income for your living expenses, or to funnel towards saving for retirement, college tuition, or whatever goals are important to you. In addition, when you have access to extra cash, you can use it to pay down the balance of your mortgage, which will automatically shorten the term of your loan. Because the term is longer, it's often easier to get approval, and you may be able to afford a larger house. If you plan to stay in the home for a long time, the longer term makes sense.
Advantages of 15-Year Mortgages
This mortgage can be shorter and sweeter than its longer counterpart. You can snag a lower interest rate, and build up your home equity more rapidly. However, your monthly payment will be higher than its longer-term counterpart. And a huge perk is that you'll pay less interest over the life of the loan, which ultimately will result in more money in your pocket.
Whichever term you choose, you always have the option to do a home refinancing if your financial situation changes. If there's too much pressure meeting your monthly payments on your 15-year loan, you can refinance for a longer term. If interest rates drop, you can take advantage of them by opting for a shorter-term.
The ultimate decision will be based on your cash flow and how you want to spend it, as you work towards the ultimate goal of the American dream: owning your home free and clear.
While the most popular terms are still 15- or 30-years, you can find a range of variations, including 10-, 20-, 25-, or even 40-year home loans. In order to find the perfect match, ask yourself the following questions:
1. How long do I plan to stay in the house?
2. How much money can I afford to pay for my mortgage each month and still have enough to save for retirement and other important financial matters?
3. How does the pay-off date fit in with my financial goals and dreams?
Advantages of 30-Year Mortgages
Like your father's Oldsmobile, the 30-year mortgage is the granddaddy of home loans. It will have lower monthly payments than a comparable shorter-term loan. As a result, you'll have more disposal income for your living expenses, or to funnel towards saving for retirement, college tuition, or whatever goals are important to you. In addition, when you have access to extra cash, you can use it to pay down the balance of your mortgage, which will automatically shorten the term of your loan. Because the term is longer, it's often easier to get approval, and you may be able to afford a larger house. If you plan to stay in the home for a long time, the longer term makes sense.
Advantages of 15-Year Mortgages
This mortgage can be shorter and sweeter than its longer counterpart. You can snag a lower interest rate, and build up your home equity more rapidly. However, your monthly payment will be higher than its longer-term counterpart. And a huge perk is that you'll pay less interest over the life of the loan, which ultimately will result in more money in your pocket.
Whichever term you choose, you always have the option to do a home refinancing if your financial situation changes. If there's too much pressure meeting your monthly payments on your 15-year loan, you can refinance for a longer term. If interest rates drop, you can take advantage of them by opting for a shorter-term.
The ultimate decision will be based on your cash flow and how you want to spend it, as you work towards the ultimate goal of the American dream: owning your home free and clear.
Home Mortgages, How Exactly Do They Work?
The American dream is the belief that, through hard work, courage, and determination, each individual can achieve financial prosperity. Most people interpret this to mean a successful career, upward mobility, and owning a home, a car, and a family with 2.5 children and a dog.
The core of this dream is based on owning a home. Since your house is likely to be the largest financial obligation you'll ever have, mortgages were created to assist you in paying for it. A mortgage loan is simply a long-term loan given by a bank or other lending institution that is secured by a specific piece of real estate. If you fail to make timely payments, the lender can repossess the property.
Because houses tend to be expensive - as are the loans to pay for them - banks allow you to repay them over extended periods of time, known as the "term". Terms can range anywhere from between 10 to 30 years. Shorter terms may have lower interest rates than their comparable long-term brothers. However, longer-term loans may offer the advantage of having lower monthly payments, because you're taking more time to pay off the debt.
In the old days, a nearby savings and loan might lend you money to purchase your home if it had enough cash lying around from its deposits. Nowadays, the money for home loans primarily comes from three major institutions: The bank that holds your loan is responsible primarily for "servicing" it.
When you have a mortgage loan, your monthly payment will generally include the following:
•An amount for the principal amount of the balance
•An amount for interest owed on that balance
•Real estate taxes
•Homeowner's insurance
Home Mortgage interest rates come in several varieties. With a "fixed rate mortgage loan," the rate and your monthly payment remains the same for the life of the loan. With an "adjustable rate mortgage loan," the interest rate changes based on a specified index. As a result, your monthly payment amount will fluctuate.
Mortgage loans come in a variety of types, including conventional, non-conventional, fixed and variable-rate, home equity loans, interest-only and reverse mortgages. At Mortgageloan.com, we can help make this part of your American dream as easy as apple pie.
The core of this dream is based on owning a home. Since your house is likely to be the largest financial obligation you'll ever have, mortgages were created to assist you in paying for it. A mortgage loan is simply a long-term loan given by a bank or other lending institution that is secured by a specific piece of real estate. If you fail to make timely payments, the lender can repossess the property.
Because houses tend to be expensive - as are the loans to pay for them - banks allow you to repay them over extended periods of time, known as the "term". Terms can range anywhere from between 10 to 30 years. Shorter terms may have lower interest rates than their comparable long-term brothers. However, longer-term loans may offer the advantage of having lower monthly payments, because you're taking more time to pay off the debt.
In the old days, a nearby savings and loan might lend you money to purchase your home if it had enough cash lying around from its deposits. Nowadays, the money for home loans primarily comes from three major institutions: The bank that holds your loan is responsible primarily for "servicing" it.
When you have a mortgage loan, your monthly payment will generally include the following:
•An amount for the principal amount of the balance
•An amount for interest owed on that balance
•Real estate taxes
•Homeowner's insurance
Home Mortgage interest rates come in several varieties. With a "fixed rate mortgage loan," the rate and your monthly payment remains the same for the life of the loan. With an "adjustable rate mortgage loan," the interest rate changes based on a specified index. As a result, your monthly payment amount will fluctuate.
Mortgage loans come in a variety of types, including conventional, non-conventional, fixed and variable-rate, home equity loans, interest-only and reverse mortgages. At Mortgageloan.com, we can help make this part of your American dream as easy as apple pie.
Mortgage Tips for a Sane Mind
1. Shop, Shop, Shop: Do not just jump on the first mortgage offer that seems remotely appealing. If you have nothing to compare it to, then how do know it is a great deal? Shop several lenders before you make a move on establishing your mortgage. Try to obtain at least comparisons so that you will be able to determine what the average pricing should be for your mortgage.
2. Don't Take the Bait: If something sounds too good to be true, then most likely it probably is too good to be true. Do not let yourself be drawn into a mortgage based solely on one appealing factor, such as a low introductory rate. Remember that introductory means that it will change after some determined period of time.
3. Think Small: Do not just limit yourself to the big national lenders. Consider local and community banks that offer mortgage lending. If you are a member of a credit union, there may be benefits to you for doing your loan through them. Try to include a couple of different types of lenders n your comparison shopping to see what the difference may actually be.
4. Read, Learn & Listen: Gain your own knowledge about mortgages. Learn how interest rates are set, how mortgage brokers are paid, and what standard mortgage fees are so that you aren't gullible. Gullible mortgage shoppers can find themselves getting ripped off.
5. Consider A Professional: Consider hiring a mortgage broker. They have the resources to shop your loan a lot faster and easier than you will be able to. They do this in return for a small fee paid by you directly or it is figured into the costs that the lender charges you for processing your mortgage. It pays off in the long-run to save a lot of time and hassle on your part to go down the mortgage road with a professional.
These are just a few mortgage tips to get you started. Use them as a guideline when you are on your mortgage shopping expedition. Good luck, and happy shopping!
2. Don't Take the Bait: If something sounds too good to be true, then most likely it probably is too good to be true. Do not let yourself be drawn into a mortgage based solely on one appealing factor, such as a low introductory rate. Remember that introductory means that it will change after some determined period of time.
3. Think Small: Do not just limit yourself to the big national lenders. Consider local and community banks that offer mortgage lending. If you are a member of a credit union, there may be benefits to you for doing your loan through them. Try to include a couple of different types of lenders n your comparison shopping to see what the difference may actually be.
4. Read, Learn & Listen: Gain your own knowledge about mortgages. Learn how interest rates are set, how mortgage brokers are paid, and what standard mortgage fees are so that you aren't gullible. Gullible mortgage shoppers can find themselves getting ripped off.
5. Consider A Professional: Consider hiring a mortgage broker. They have the resources to shop your loan a lot faster and easier than you will be able to. They do this in return for a small fee paid by you directly or it is figured into the costs that the lender charges you for processing your mortgage. It pays off in the long-run to save a lot of time and hassle on your part to go down the mortgage road with a professional.
These are just a few mortgage tips to get you started. Use them as a guideline when you are on your mortgage shopping expedition. Good luck, and happy shopping!
Mortgage Interest Rates
Mortgage interest rates favorable to home buying are still available. Mortgage interest rates have moved higher than the sub-six percent levels that were available from 2003-2005, however, the current 30-year 6.34 percent fixed mortgage average is still well below the eight percent average over the last 20 years. The most important characteristic of mortgage interest rates is whether they are fixed or adjustable.
Since July of 2002, the average 30-year fixed rate mortgage has remained below 6.5 percent. While Federal Reserve short term interest rate increases affect fixed mortgage rates other indicators are also crucial; yields on long term government bonds and fixed rate mortgages are closely linked. Demand for US government bonds and domestic inflation that weighs heavy on that demand must be examined. Low six percent mortgage interest rates will become a luxury of the past as rates move into the upper 6s in the second half of 2006 bound to revisit the ten-year average of 6.9 percent. Regardless, borrowers are still favoring fixed-rate mortgages over adjustable-rate mortgages because the difference in initial rates is not enticing; current 30-year fixed rate averages 6.34 percent, while a 5/1 ARM is 6.08 percent and a one-year ARM is 5.73 percent.
Adjustable Rates & the ARM
If you have an adjustable rate mortgage (ARM) it might be smart to keep a close eye on interest rate movements in the market. ARMs bound to reset in 2010 with a hefty increase in their monthly mortgage payment may be an unpleasantly surprise some folks. Those people whose ARMs have already reset know that substantial increases in monthly mortgage payments can be burdensome to say the least. The one year Treasury, a common index for adjustable rate mortgages, may top five percent by the time the Federal Reserve is done raising interest rates, add on the margin of 2.5 percentage points and many ARM borrowers will be looking at a rate of 7.5 percent. Households that can withstand an increase in their monthly mortgage payment may opt for an ARM in hopes of seeing mortgage interest rates fall if the Federal Reserve does have to lower short term interest rates in the further off future. For people on a more fixed income who have or are thinking about an adjustable rate mortgage beware that short term interest rates, which are on an upward trend, can drastically affect a person's mortgage debt load.
Mortgage Interest Rates - Where do we go from here?
Mortgage interest rates are still on an upward trend and the hot refinance market has been cooling off. People are refinancing, but their motivations are different. Most refinancing that is going on right now is more need-driven than rate-driven, people are getting out of ARM mortgages as opposed to everyone looking for lower rates. That being said, for people who have not refinanced and can qualify for a lower rate, immediately is always the best time to get started. The 30-year fixed rate average, mentioned above, of 6.34 percent very well may rise to match the 6.9 percent ten-year average in the latter half of 2009; however, that is still well below the 20-year average of eight percent.
More Indicators
Mortgage interest rates have more indicators than discussed above that can predict the movements of mortgage interest rates with decent accuracy. Of course, the short term interest rate is a vital metric, but let's takes another look at the link between 30-year fixed mortgage rates and long term government bonds. You already know that the fluctuations of 30-year fixed mortgage rate averages are closely tied to the yields of 10 year Treasury notes. Those Treasury notes rose precisely a quarter-point during the eight weeks between Federal Reserve meetings, from 4.53 percent on January 31 to 4.78 percent on March 28. Similar to that mentioned above, fixed mortgage rates don't move in lock step with long term Treasury yields, but it's a pretty good indicator. One last thing to remember, currently variable interest rates on adjustable mortgages seem to be moving in tandem with federal fund rates, which are moving upward - that's one last warning for you folks with adjustable rate mortgages.
Since July of 2002, the average 30-year fixed rate mortgage has remained below 6.5 percent. While Federal Reserve short term interest rate increases affect fixed mortgage rates other indicators are also crucial; yields on long term government bonds and fixed rate mortgages are closely linked. Demand for US government bonds and domestic inflation that weighs heavy on that demand must be examined. Low six percent mortgage interest rates will become a luxury of the past as rates move into the upper 6s in the second half of 2006 bound to revisit the ten-year average of 6.9 percent. Regardless, borrowers are still favoring fixed-rate mortgages over adjustable-rate mortgages because the difference in initial rates is not enticing; current 30-year fixed rate averages 6.34 percent, while a 5/1 ARM is 6.08 percent and a one-year ARM is 5.73 percent.
Adjustable Rates & the ARM
If you have an adjustable rate mortgage (ARM) it might be smart to keep a close eye on interest rate movements in the market. ARMs bound to reset in 2010 with a hefty increase in their monthly mortgage payment may be an unpleasantly surprise some folks. Those people whose ARMs have already reset know that substantial increases in monthly mortgage payments can be burdensome to say the least. The one year Treasury, a common index for adjustable rate mortgages, may top five percent by the time the Federal Reserve is done raising interest rates, add on the margin of 2.5 percentage points and many ARM borrowers will be looking at a rate of 7.5 percent. Households that can withstand an increase in their monthly mortgage payment may opt for an ARM in hopes of seeing mortgage interest rates fall if the Federal Reserve does have to lower short term interest rates in the further off future. For people on a more fixed income who have or are thinking about an adjustable rate mortgage beware that short term interest rates, which are on an upward trend, can drastically affect a person's mortgage debt load.
Mortgage Interest Rates - Where do we go from here?
Mortgage interest rates are still on an upward trend and the hot refinance market has been cooling off. People are refinancing, but their motivations are different. Most refinancing that is going on right now is more need-driven than rate-driven, people are getting out of ARM mortgages as opposed to everyone looking for lower rates. That being said, for people who have not refinanced and can qualify for a lower rate, immediately is always the best time to get started. The 30-year fixed rate average, mentioned above, of 6.34 percent very well may rise to match the 6.9 percent ten-year average in the latter half of 2009; however, that is still well below the 20-year average of eight percent.
More Indicators
Mortgage interest rates have more indicators than discussed above that can predict the movements of mortgage interest rates with decent accuracy. Of course, the short term interest rate is a vital metric, but let's takes another look at the link between 30-year fixed mortgage rates and long term government bonds. You already know that the fluctuations of 30-year fixed mortgage rate averages are closely tied to the yields of 10 year Treasury notes. Those Treasury notes rose precisely a quarter-point during the eight weeks between Federal Reserve meetings, from 4.53 percent on January 31 to 4.78 percent on March 28. Similar to that mentioned above, fixed mortgage rates don't move in lock step with long term Treasury yields, but it's a pretty good indicator. One last thing to remember, currently variable interest rates on adjustable mortgages seem to be moving in tandem with federal fund rates, which are moving upward - that's one last warning for you folks with adjustable rate mortgages.
Avoiding Prepayment Penalties
Prepayment penalties, also known as cancellation fees, are one of the classic pitfalls that await the unwary borrower. All too often, a homeowner selling or refinancing their home has been stunned to discover that they first have to pay a penalty of several thousand dollars to get out of their current mortgage.
A prepayment penalty is a fee assessed for paying off part or all of your mortgage ahead of schedule. Often, borrowers aren’t even aware their mortgage has one until they trigger its provisions – although required to be disclosed by law, they often get lost in the stacks of papers that need to be signed at closing.
Fortunately, prepayment penalties are going to be a lot easier to spot on new mortgages from now on. The new Truth in Lending form, which takes effect Feb. 1, 2010, specifically requires lenders to declare whether a mortgage includes a prepayment penalty or not. Of course, that won’t do much good for unwary homeowners who already have prepayment penalties on their current mortgages and don’t realize it.
Prepayment penalties are often portrayed as a bad thing to be avoided at all costs. In reality, they’re just one more thing to be negotiated when obtaining a mortgage. Accepting a prepayment penalty may enable you to get a lower mortgage rate or obtain a “cost-free” mortgage where you pay nothing up front and the closing costs are rolled into the loan itself. They really only become a negative when they’re sprung upon unwary borrowers by hiding them among the boilerplate of the mortgage agreement – which the new Truth in Lending form is supposed to make much harder to do.
A prepayment penalty, just like it sounds, is a penalty for paying off your mortgage ahead of schedule. Typically, the penalty is 2-4 percent of the loan balance, which can be a pretty hefty bite – 2 percent of a $200,000 loan is $4,000. If you’re looking to refinance your loan, a prepayment penalty can pretty much wipe out any savings you hoped to realize.
Banks like to require prepayment penalties to ensure they earn a minimum return off a loan – if you pay your mortgage off after one year, they don’t earn much money from it. The good news is, most prepayment penalties expire after five years – and they often shrink over time, so the penalty for paying your loan off after four years is less than it would be if you paid it off after two.
Accelerated payments can trigger penalty
Prepayment penalties can hit you in several ways. First, you could get hit by a prepayment penalty if you try to refinance your mortgage after less than five years – since refinancing means taking out a new mortgage to pay off your old one. You can also get hit if you sell your house within a few years of buying or refinancing it. A prepayment penalty can also affect you if you try to pay your loan off faster by making additional payments – although most prepayment penalties aren’t triggered unless you pay off at least 20 percent of the balance in a single year, a few may penalize you for any accelerated payments.
Accepting a loan with a prepayment penalty included may not always be a bad deal, though. If you plan to stay in the home at least five years, you may be able to get a slightly lower rate with a prepayment penalty. A “no-cost” mortgage or refinance, in which the closing costs are rolled into the loan in the form of a higher interest rate, will nearly always require a prepayment penalty, to ensure the bank earns its money back.
"Hard" vs. "soft" penalties
There are different types of prepayment penalties as well. A “soft” prepayment penalty is not imposed if you sell the home or make accelerated payments, only if you refinance into a new mortgage within the first few years. A “hard” prepayment penalty, on the other hand, is imposed regardless of the reason for paying early.
The key thing is to be sure you understand the terms of your mortgage and understand what you’re giving up and gaining in return for accepting one. If you think it’s highly unlikely you’ll refinance or pay the loan off early, you might be able to shave a bit off your interest rate by accepting a prepayment penalty. But if you may be moving or refinancing within a few years, you may be better off paying a higher rate with no potential penalty attached for paying off early.
A prepayment penalty is a fee assessed for paying off part or all of your mortgage ahead of schedule. Often, borrowers aren’t even aware their mortgage has one until they trigger its provisions – although required to be disclosed by law, they often get lost in the stacks of papers that need to be signed at closing.
Fortunately, prepayment penalties are going to be a lot easier to spot on new mortgages from now on. The new Truth in Lending form, which takes effect Feb. 1, 2010, specifically requires lenders to declare whether a mortgage includes a prepayment penalty or not. Of course, that won’t do much good for unwary homeowners who already have prepayment penalties on their current mortgages and don’t realize it.
Prepayment penalties are often portrayed as a bad thing to be avoided at all costs. In reality, they’re just one more thing to be negotiated when obtaining a mortgage. Accepting a prepayment penalty may enable you to get a lower mortgage rate or obtain a “cost-free” mortgage where you pay nothing up front and the closing costs are rolled into the loan itself. They really only become a negative when they’re sprung upon unwary borrowers by hiding them among the boilerplate of the mortgage agreement – which the new Truth in Lending form is supposed to make much harder to do.
A prepayment penalty, just like it sounds, is a penalty for paying off your mortgage ahead of schedule. Typically, the penalty is 2-4 percent of the loan balance, which can be a pretty hefty bite – 2 percent of a $200,000 loan is $4,000. If you’re looking to refinance your loan, a prepayment penalty can pretty much wipe out any savings you hoped to realize.
Banks like to require prepayment penalties to ensure they earn a minimum return off a loan – if you pay your mortgage off after one year, they don’t earn much money from it. The good news is, most prepayment penalties expire after five years – and they often shrink over time, so the penalty for paying your loan off after four years is less than it would be if you paid it off after two.
Accelerated payments can trigger penalty
Prepayment penalties can hit you in several ways. First, you could get hit by a prepayment penalty if you try to refinance your mortgage after less than five years – since refinancing means taking out a new mortgage to pay off your old one. You can also get hit if you sell your house within a few years of buying or refinancing it. A prepayment penalty can also affect you if you try to pay your loan off faster by making additional payments – although most prepayment penalties aren’t triggered unless you pay off at least 20 percent of the balance in a single year, a few may penalize you for any accelerated payments.
Accepting a loan with a prepayment penalty included may not always be a bad deal, though. If you plan to stay in the home at least five years, you may be able to get a slightly lower rate with a prepayment penalty. A “no-cost” mortgage or refinance, in which the closing costs are rolled into the loan in the form of a higher interest rate, will nearly always require a prepayment penalty, to ensure the bank earns its money back.
"Hard" vs. "soft" penalties
There are different types of prepayment penalties as well. A “soft” prepayment penalty is not imposed if you sell the home or make accelerated payments, only if you refinance into a new mortgage within the first few years. A “hard” prepayment penalty, on the other hand, is imposed regardless of the reason for paying early.
The key thing is to be sure you understand the terms of your mortgage and understand what you’re giving up and gaining in return for accepting one. If you think it’s highly unlikely you’ll refinance or pay the loan off early, you might be able to shave a bit off your interest rate by accepting a prepayment penalty. But if you may be moving or refinancing within a few years, you may be better off paying a higher rate with no potential penalty attached for paying off early.
Get Preapproved Before You Start Home Shopping
Getting a mortgage can be difficult these days. So when shopping for a new home, it helps to be preapproved before you start your search or make an offer to a seller.
A preapproved mortgage means that a lender has already reviewed your income, credit and assets to verify that you can qualify for the mortgage you’re seeking. It shows a seller that you’re serious about buying a home and can deliver on your purchase offer, which puts you in a better position to negotiate.
Getting preapproved means you’ve passed a higher level of lender scrutiny than someone who’s simply been prequalified. The latter simply means the lender thinks you ought be able to qualify for a mortgage, based on your finances as you describe them. A preapproval means the lender has confirmed it.
A preapproval offers a number of advantages for someone looking to buy a home. In particular, lets you know how much you can borrow, given your finances and credit, so you know what price range of homes you can qualify for. This simplifies the home shopping process by enabling you to target neighborhoods in your price range.
Getting prequalified also assures you that you will be able to obtain a mortgage when you find a home in that range, so you don’t have to worry about wasting money on things like application fees and an appraisal, which can happen if you’re turned down. It also allows you to compare loan packages from multiple lenders to see which one best suits your needs.
What you'll need
To be preapproved, you’ll need to submit the following to a potential lender:
-Your tax returns and W-2s for the past two years
-Pay stubs to prove you’re currently employed
-Documentation of other types of income, including investments, child support or a second job
-Recent bank statements
-A letter authorizing the lender to obtain your current credit report, although the bank will likely have a standardized form for this.
A preapproval will outline the general terms of the loan you qualify for, but it won’t lock you into an interest rate. Interest rates fluctuate daily, and since it can take several weeks or even months to find a suitable property, they can rise or fall significantly between the time you’re preapproved and the time you’re prepared to apply for the loan itself.
Preapproval doesn't lock in interest rate
One thing a preapproval won't do is let you know exactly what mortage interest rate you'll get. Rates fluctuate frequently, and you don’t want to actually “lock in” a rate until your purchase offer has been accepted. The terms outlined in your preapproval letter will be based on the prevailing rates at the time you apply, but be aware those can change by the time you apply.
One thing to remember is that getting preapproved doesn’t commit you to that lender. Once your purchase offer is accepted, you can still check around with other lenders to get the best deal you can find before committing.
Your preapproval letter has only a finite lifespan – they’re typically good for only 60 to 90 days. You can typically get reapproved easily if you haven’t found a home by then, but lenders will want to check to make sure your employment status or other key attributes haven’t changed.
A preapproved mortgage means that a lender has already reviewed your income, credit and assets to verify that you can qualify for the mortgage you’re seeking. It shows a seller that you’re serious about buying a home and can deliver on your purchase offer, which puts you in a better position to negotiate.
Getting preapproved means you’ve passed a higher level of lender scrutiny than someone who’s simply been prequalified. The latter simply means the lender thinks you ought be able to qualify for a mortgage, based on your finances as you describe them. A preapproval means the lender has confirmed it.
A preapproval offers a number of advantages for someone looking to buy a home. In particular, lets you know how much you can borrow, given your finances and credit, so you know what price range of homes you can qualify for. This simplifies the home shopping process by enabling you to target neighborhoods in your price range.
Getting prequalified also assures you that you will be able to obtain a mortgage when you find a home in that range, so you don’t have to worry about wasting money on things like application fees and an appraisal, which can happen if you’re turned down. It also allows you to compare loan packages from multiple lenders to see which one best suits your needs.
What you'll need
To be preapproved, you’ll need to submit the following to a potential lender:
-Your tax returns and W-2s for the past two years
-Pay stubs to prove you’re currently employed
-Documentation of other types of income, including investments, child support or a second job
-Recent bank statements
-A letter authorizing the lender to obtain your current credit report, although the bank will likely have a standardized form for this.
A preapproval will outline the general terms of the loan you qualify for, but it won’t lock you into an interest rate. Interest rates fluctuate daily, and since it can take several weeks or even months to find a suitable property, they can rise or fall significantly between the time you’re preapproved and the time you’re prepared to apply for the loan itself.
Preapproval doesn't lock in interest rate
One thing a preapproval won't do is let you know exactly what mortage interest rate you'll get. Rates fluctuate frequently, and you don’t want to actually “lock in” a rate until your purchase offer has been accepted. The terms outlined in your preapproval letter will be based on the prevailing rates at the time you apply, but be aware those can change by the time you apply.
One thing to remember is that getting preapproved doesn’t commit you to that lender. Once your purchase offer is accepted, you can still check around with other lenders to get the best deal you can find before committing.
Your preapproval letter has only a finite lifespan – they’re typically good for only 60 to 90 days. You can typically get reapproved easily if you haven’t found a home by then, but lenders will want to check to make sure your employment status or other key attributes haven’t changed.
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