Midnight has struck. The low-interest coach is turning back into a pumpkin. Borrowers who did not refinance or purchase a home by stroke of twelve have lost forever their opportunity to get a handsome prince of an interest rate.
At least, that’s the popular perception of what’s happening now that the Fed has officially concluded its purchases of mortgage-backed securities. With the Fed out of the picture, the thinking goes, rates must surely rise as far and as fast as they fell when the Fed announced it would buy $1.25 trillion in mortgage securities, sending mortgage rate plummeting to record lows.
Fortunately, that seems to be turning out to be a fairy tale. Although many experts began 2010 convinced that interest rates Middletown would rapidly rise by one-half to a full percentage point once the Fed quit buying securities at the end of March, there’s been no indication of that happening.
In fact, as the deadline approached, 30-year interest rates continued to fluctuate just below the 5 percent mark, as tracked by Freddie Mac, with no sign of moving upward. And analysts are now predicting a much smaller rate increase over the coming months, perhaps around a quarter of a percent.
What happened? For starters, the Fed has been gradually reducing its purchases of mortgage securities as the end of the program neared, rather than simply cutting things off after March 30. That lessened the shock that would have occurred if it had simply pulled out all at once.
Investors moving in to take up slack
For another, by buying up such a huge chunk of the mortgages issued over the past year, the Fed has not only driven interest rates downward, it’s also crowded out many of the private investors who were interested in mortgage securities. These investors are now starting to come back into the market, but the pent-up demand is helping to keep a lid on rates, at least for now.
What does this mean for borrowers? It means you should still be able to get an exceptionally good interest rate on a mortgage Middletown, either to purchase a home or refinance an existing loan, for some time to come. On a historical basis, anything below 5.5 percent for a 30-year loan is unusually good; rates below 5 percent, such as we’ve seen over most of the past year, are nearly unheard of.
From the perspective of Spring 2010, a rate of 5.25 percent come July might not sound that attractive, but three years down the road, it may turn out to be a screamingly good deal. And on home loans Middletown, it’s the long term that matters.
Showing posts with label home buyers. Show all posts
Showing posts with label home buyers. Show all posts
Wednesday, April 14, 2010
Interest-Only Loans Soon to be Extinct
If you’re looking to purchase a home or refinance a mortgage Middletown, your options are getting a bit slimmer.
Interest-only loans, already a rarity after the collapse of the subprime mortgage market, are just about to dry up completely. They won’t totally disappear, but getting one will go from difficult to extremely hard.
Freddie, Fannnie backing out
What’s happening is that Freddie Mac and Fannie Mae, the government-supported secondary lenders who insure most of the mortgages made in the United States, have said they will no longer purchase interest-only loans after Fall 2010. Given the time it takes these developments to work through the system, you can expect that lenders are already starting to shut the pipeline down.
That’s too bad, because interest-only loans Middletown can be an effective financial tool for qualified borrowers who use them correctly. The problem was that, during the housing bubble, they were issued to many borrowers who could never afford them unless housing prices continued to increase. When the economy and housing market soured, many of loans defaulted and continue to do so.
Those losses are why Fannie and Freddie are getting out of the interest-only loan business. Many private lenders have already done so as well.
Advantages of an interest-only loan
At first glance, an interest-only loan may sound like a dumb idea. You take out a mortgage pay only the interest for the first few years, typically five or 10. At that point, the loan resets to a fully amortizing loan, meaning you have to pay off the entire principal, plus the interest, over the remaining 20 to 25 years of the loan. Naturally, that’s going to make your payments go through the roof.
But it can work quite well for some borrowers, particularly in a normal market where prices are stable or gradually appreciate. In particular, it can be a good choice for someone who doesn’t plan to stay in a home more than five or 10 years, and has no desire to ever own the home free and clear.
In that event, an interest-only loan Middletown can allow you to stay in the home for next to nothing – because mortgage interest is tax-deductable. Sophisticated investors sometimes use interest-only mortgages to allow them to invest their money elsewhere, rather than using part of it to pay down mortgage principal on a home they never plan to own outright.
Interest-only loans, already a rarity after the collapse of the subprime mortgage market, are just about to dry up completely. They won’t totally disappear, but getting one will go from difficult to extremely hard.
Freddie, Fannnie backing out
What’s happening is that Freddie Mac and Fannie Mae, the government-supported secondary lenders who insure most of the mortgages made in the United States, have said they will no longer purchase interest-only loans after Fall 2010. Given the time it takes these developments to work through the system, you can expect that lenders are already starting to shut the pipeline down.
That’s too bad, because interest-only loans Middletown can be an effective financial tool for qualified borrowers who use them correctly. The problem was that, during the housing bubble, they were issued to many borrowers who could never afford them unless housing prices continued to increase. When the economy and housing market soured, many of loans defaulted and continue to do so.
Those losses are why Fannie and Freddie are getting out of the interest-only loan business. Many private lenders have already done so as well.
Advantages of an interest-only loan
At first glance, an interest-only loan may sound like a dumb idea. You take out a mortgage pay only the interest for the first few years, typically five or 10. At that point, the loan resets to a fully amortizing loan, meaning you have to pay off the entire principal, plus the interest, over the remaining 20 to 25 years of the loan. Naturally, that’s going to make your payments go through the roof.
But it can work quite well for some borrowers, particularly in a normal market where prices are stable or gradually appreciate. In particular, it can be a good choice for someone who doesn’t plan to stay in a home more than five or 10 years, and has no desire to ever own the home free and clear.
In that event, an interest-only loan Middletown can allow you to stay in the home for next to nothing – because mortgage interest is tax-deductable. Sophisticated investors sometimes use interest-only mortgages to allow them to invest their money elsewhere, rather than using part of it to pay down mortgage principal on a home they never plan to own outright.
More Types of Lenders
Hard Money Lenders
If you can’t qualify through a portfolio lender, a hard money lender may be your option of last resort. Hard money lenders tend to be private individuals with money to lend, though they may be set up as business operations. Interest rates tend to be quite high – 12 percent is not uncommon – and down payments may be 30 percent and above. Hard money lenders are typically used for short-term loans that are expected to be repaid quickly, such as for investment property, rather than long-term amortizing loans Middletown for a home purchase.
Direct Lenders
Another term you may encounter is “direct lender.” A direct lender simply means a lender that originates its own home loans Middletown – either with its own funds or borrowed funds. It can therefore be either a mortgage banker or portfolio lender. It does not, therefore, act as an agent for a wholesale lender. Direct lenders are inevitably retail lenders as well, because they do not involve third parties or middlemen in making loans to consumers.
Correspondent Lenders
A final term you may hear is “correspondent lender.” Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria.
Correspondent lenders earn their money by collecting a point or two when the mortgage is issued. Immediately selling the loan to a sponsor pretty much guarantees they’ll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor’s standards, in which case the correspondent must either find another investor or carry the loan itself.
Again, these terms are not always exclusive, but instead generally describe types of mortgage functions that various lenders may perform, sometimes at the same time. But understanding what each of these does can be a great help in understanding how the mortgage process Middletown works and form a basis for evaluating mortgage offers.
If you can’t qualify through a portfolio lender, a hard money lender may be your option of last resort. Hard money lenders tend to be private individuals with money to lend, though they may be set up as business operations. Interest rates tend to be quite high – 12 percent is not uncommon – and down payments may be 30 percent and above. Hard money lenders are typically used for short-term loans that are expected to be repaid quickly, such as for investment property, rather than long-term amortizing loans Middletown for a home purchase.
Direct Lenders
Another term you may encounter is “direct lender.” A direct lender simply means a lender that originates its own home loans Middletown – either with its own funds or borrowed funds. It can therefore be either a mortgage banker or portfolio lender. It does not, therefore, act as an agent for a wholesale lender. Direct lenders are inevitably retail lenders as well, because they do not involve third parties or middlemen in making loans to consumers.
Correspondent Lenders
A final term you may hear is “correspondent lender.” Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria.
Correspondent lenders earn their money by collecting a point or two when the mortgage is issued. Immediately selling the loan to a sponsor pretty much guarantees they’ll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor’s standards, in which case the correspondent must either find another investor or carry the loan itself.
Again, these terms are not always exclusive, but instead generally describe types of mortgage functions that various lenders may perform, sometimes at the same time. But understanding what each of these does can be a great help in understanding how the mortgage process Middletown works and form a basis for evaluating mortgage offers.
Different Types of Lenders
Wholesale and Retail Lenders
Wholesale lenders are banks or other institutions that do not deal directly with consumers, but offer their loans through third parties such as mortgage brokers, credit unions, other banks, etc. Often, these are large banks that also have retail operations that work with consumers directly. Many large banks, such as Bank of America and Wells Fargo, have both wholesale and retail operations.
In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party – bank, credit union, or mortgage broker – in most cases is simply acting as an agent in return for a fee.
Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services.
Warehouse Lenders
Somewhat similar to wholesale lenders are warehouse lenders. The key difference here is that, instead of providing loans through intermediaries, they lend money to banks or other mortgage lenders Middletown with which to issue their own loans, on their own terms. The warehouse lender is repaid when the mortgage lender sells the loan to investors.
Mortgage Bankers
Another distinction is between portfolio lenders and mortgage bankers. The vast majority of U.S. mortgage lenders Middletown are mortgage bankers, who don’t lend their own money, but borrow funds at short-term rates from warehouse lenders (see above) to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages issue in the United States.
Portfolio Lenders
Portfolio lenders, on the other hand, use their own money when making home loans Middletown, which they typically maintain on their own books, or “portfolio.” Because they don’t have to satisfy the demands of outside investors, they can set their own terms for the loans they issue.
This makes portfolio lenders a good choice for “niche” borrowers who don’t fit the typical lender profile – perhaps because they’re seeking a jumbo loan, are considering a unique property, have flawed credit but strong finances, or may be looking at investment property. You may pay higher rates for this service, but not always – because portfolio lenders tend to be very careful who they lend to, their rates are sometimes quite low.
Wholesale lenders are banks or other institutions that do not deal directly with consumers, but offer their loans through third parties such as mortgage brokers, credit unions, other banks, etc. Often, these are large banks that also have retail operations that work with consumers directly. Many large banks, such as Bank of America and Wells Fargo, have both wholesale and retail operations.
In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party – bank, credit union, or mortgage broker – in most cases is simply acting as an agent in return for a fee.
Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services.
Warehouse Lenders
Somewhat similar to wholesale lenders are warehouse lenders. The key difference here is that, instead of providing loans through intermediaries, they lend money to banks or other mortgage lenders Middletown with which to issue their own loans, on their own terms. The warehouse lender is repaid when the mortgage lender sells the loan to investors.
Mortgage Bankers
Another distinction is between portfolio lenders and mortgage bankers. The vast majority of U.S. mortgage lenders Middletown are mortgage bankers, who don’t lend their own money, but borrow funds at short-term rates from warehouse lenders (see above) to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages issue in the United States.
Portfolio Lenders
Portfolio lenders, on the other hand, use their own money when making home loans Middletown, which they typically maintain on their own books, or “portfolio.” Because they don’t have to satisfy the demands of outside investors, they can set their own terms for the loans they issue.
This makes portfolio lenders a good choice for “niche” borrowers who don’t fit the typical lender profile – perhaps because they’re seeking a jumbo loan, are considering a unique property, have flawed credit but strong finances, or may be looking at investment property. You may pay higher rates for this service, but not always – because portfolio lenders tend to be very careful who they lend to, their rates are sometimes quite low.
Friday, March 19, 2010
How do Mortgages 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 New Jersey 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 New Jersey primarily comes from three major institutions: The Federal National Mortgage Association, known as Fannie Mae; the Federal Home Loan Mortgage Corporation (known as Freddie Mac); and the Government National Mortgage Association (known as Ginnie Mae). The bank that holds your loan is responsible primarily for "servicing" it.
When you have a mortgage loan New Jersey, 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
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 New Jersey 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 New Jersey primarily comes from three major institutions: The Federal National Mortgage Association, known as Fannie Mae; the Federal Home Loan Mortgage Corporation (known as Freddie Mac); and the Government National Mortgage Association (known as Ginnie Mae). The bank that holds your loan is responsible primarily for "servicing" it.
When you have a mortgage loan New Jersey, 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
Friday, March 5, 2010
Getting a Loan with bad Credit Contd.
Improving your credit
So what can you do if you’ve got bad credit? The first thing you should consider is making sure your credit reports are accurate and that you’re not being penalized for bad information. You’re entitled to receive a free copy of your credit report from each of the three major credit reporting agencies each year. Use the official web site, www.annualcreditreport.com , established by the three agencies to get your scores from Transunion, Experian and Equifax and check them for errors. You can also order your actual credit scores, but will have to pay a fee for that.
Don’t bother with so-called “credit repair” services which promise to boost your credit score in return for a fee. There’s nothing they can do for you legally to improve your score other than check your report for errors, the same as you can do, and some of these services have been known to suggest measures that can get you in trouble with the law – such as obtaining a new social security number.
Waiting for better scores
The best strategy for dealing with a bad credit score may be to try to improve your credit rating and apply for a mortgage at a later date. Generally, the impact of most negative items on your credit report begins to diminish after about two years, so if you can maintain a good payment record on your other debts over that time, your credit should show significant improvement over a year or two.
Of course, a foreclosure stays on your credit for seven years and a bankruptcy for 10, but even here, the major negative impacts begin to diminish after a few years, and you may be able to qualify for a mortgage again within three years of such an event.
Waiting means you won’t be able to take advantage of the ultra-low rates currently available, but you may find that by waiting for your score to improve, the rates you’ll be able to get with good credit in two-three years may be better than what you can qualify for today, even in the current low-rate environment.
If you need a mortgage now
If waiting isn’t an option – you need to refinance or buy a home right now – there are some options to consider. One is to get a co-signer, usually a close relative, to help you qualify. But bear in mind that in the event you default, the co-signer will be liable for the full value of the mortgage, so you only want to use this approach with someone you have a solid and trustworthy relationship with, and only if you are certain you will be able to meet your obligations.
Another possibility for couples, when only one partner has poor credit, is to seek a mortgage or refinance solely in the name of the partner with good credit. However, this means you won’t be able to list both persons’ income and assets on the mortgage application – just those of the partner who’s actually applying for the loan, which can seriously limit how much you can borrow.
Don’t assume that you have to borrow right now just because interest rates and home prices are very low right now. Whatever approach you take – borrowing now or working to improve your credit – should depend on careful assessment of what makes the most sense for you over the long term.
So what can you do if you’ve got bad credit? The first thing you should consider is making sure your credit reports are accurate and that you’re not being penalized for bad information. You’re entitled to receive a free copy of your credit report from each of the three major credit reporting agencies each year. Use the official web site, www.annualcreditreport.com , established by the three agencies to get your scores from Transunion, Experian and Equifax and check them for errors. You can also order your actual credit scores, but will have to pay a fee for that.
Don’t bother with so-called “credit repair” services which promise to boost your credit score in return for a fee. There’s nothing they can do for you legally to improve your score other than check your report for errors, the same as you can do, and some of these services have been known to suggest measures that can get you in trouble with the law – such as obtaining a new social security number.
Waiting for better scores
The best strategy for dealing with a bad credit score may be to try to improve your credit rating and apply for a mortgage at a later date. Generally, the impact of most negative items on your credit report begins to diminish after about two years, so if you can maintain a good payment record on your other debts over that time, your credit should show significant improvement over a year or two.
Of course, a foreclosure stays on your credit for seven years and a bankruptcy for 10, but even here, the major negative impacts begin to diminish after a few years, and you may be able to qualify for a mortgage again within three years of such an event.
Waiting means you won’t be able to take advantage of the ultra-low rates currently available, but you may find that by waiting for your score to improve, the rates you’ll be able to get with good credit in two-three years may be better than what you can qualify for today, even in the current low-rate environment.
If you need a mortgage now
If waiting isn’t an option – you need to refinance or buy a home right now – there are some options to consider. One is to get a co-signer, usually a close relative, to help you qualify. But bear in mind that in the event you default, the co-signer will be liable for the full value of the mortgage, so you only want to use this approach with someone you have a solid and trustworthy relationship with, and only if you are certain you will be able to meet your obligations.
Another possibility for couples, when only one partner has poor credit, is to seek a mortgage or refinance solely in the name of the partner with good credit. However, this means you won’t be able to list both persons’ income and assets on the mortgage application – just those of the partner who’s actually applying for the loan, which can seriously limit how much you can borrow.
Don’t assume that you have to borrow right now just because interest rates and home prices are very low right now. Whatever approach you take – borrowing now or working to improve your credit – should depend on careful assessment of what makes the most sense for you over the long term.
Chapter 7 Bankruptcy and Foreclosure
Chapter 7 can eliminate second liens after foreclosure
For a homeowner who has decided to go ahead and surrender their home through foreclosure, Ebert said a Chapter 7 may be useful for extinguishing potential claims by secondary lienholders, such as in the case of a home equity loan or second mortgage, who might otherwise seek repayment by laying claim to other assets held by the homeowner. Some states allow this, others do not - this is one of the areas where a bankruptcy attorney licensed to practice in your state can be helpful.
It should be noted that a bankruptcy does not provide relief from all debts - unpaid taxes, child support, alimony and loans obtained through fraud, among certain other debts, cannot be extinguished by bankruptcy.
Impacts on credit
Finally, there are the impacts on ones credit rating to consider. As mentioned above, a bankruptcy remains on your credit rating for 10 years, a foreclosure for only seven. However, many mortgage lenders may prefer to write a mortgage for someone with a bankruptcy on their record rather than a foreclosure.
Furthermore, many lenders will actively seek out persons who have recently filed for bankruptcy - Ebert said it's not uncommon for persons to receive credit card offers during the process itself. The bottom line is, credit can still be available after a bankruptcy - but it's going to be much more expensive than before. Bankruptcy and its impacts on your personal and financial life can be very complicated. That's why it's important to talk with a qualified bankruptcy attorney and preferably, a personal financial advisor as well to sort out the pros and cons before taking such a major step.
For a homeowner who has decided to go ahead and surrender their home through foreclosure, Ebert said a Chapter 7 may be useful for extinguishing potential claims by secondary lienholders, such as in the case of a home equity loan or second mortgage, who might otherwise seek repayment by laying claim to other assets held by the homeowner. Some states allow this, others do not - this is one of the areas where a bankruptcy attorney licensed to practice in your state can be helpful.
It should be noted that a bankruptcy does not provide relief from all debts - unpaid taxes, child support, alimony and loans obtained through fraud, among certain other debts, cannot be extinguished by bankruptcy.
Impacts on credit
Finally, there are the impacts on ones credit rating to consider. As mentioned above, a bankruptcy remains on your credit rating for 10 years, a foreclosure for only seven. However, many mortgage lenders may prefer to write a mortgage for someone with a bankruptcy on their record rather than a foreclosure.
Furthermore, many lenders will actively seek out persons who have recently filed for bankruptcy - Ebert said it's not uncommon for persons to receive credit card offers during the process itself. The bottom line is, credit can still be available after a bankruptcy - but it's going to be much more expensive than before. Bankruptcy and its impacts on your personal and financial life can be very complicated. That's why it's important to talk with a qualified bankruptcy attorney and preferably, a personal financial advisor as well to sort out the pros and cons before taking such a major step.
Avoiding Foreclosure Through Bankruptcy
Avoiding foreclosure through Chapter 13 bankruptcy
David Ebert, a bankruptcy attorney and partner with Ebert Law Office PC in Hurst, Texas, sid that most homeowners who resort to bankruptcy to avoid a foreclosure will file a Chapter 13 bankruptcy. A Chapter 13 doesn't actually wipe out the debt, serves to temporarily shield debtors from their creditors until a court-ordered repayment schedule can be worked out.
"It's intended for somebody who had a loss of income or a short-term decline in income," Ebert explained.
Once a Chapter 13 filing occurs, all debt collection efforts are halted for several months during what is called a forbearance period, during which a court will work out terms for repaying the debt. Usually, the court will set up a schedule over three to five years over which the debtor will repay the arrears, or debt owed.
Need to be able to maintain payment schedule
For a Chapter 13 to successfully avert a foreclosure, a homeowner must be able to pay off the arrearage while at the same time resuming his or her original mortgage payments - which can be a hefty financial burden. Otherwise, the property will soon fall back into foreclosure.
Ebert said it may be possible in some cases to work out a loan modification as part of the bankruptcy, thereby reducing the ongoing mortgage payments so the homeowner can more readily handle the burden of paying both the mortgage and arrears.
Another type of consumer bankruptcy is a Chapter 7, which Ebert said is rarely useful in avoiding a foreclosure or loss of other secured property. That's because while a Chapter 7 can wipe out unsecured debts, secured debts are tied to a specific asset - such as a mortgage secured by a home - which reverts to the creditor in a Chapter 7.
David Ebert, a bankruptcy attorney and partner with Ebert Law Office PC in Hurst, Texas, sid that most homeowners who resort to bankruptcy to avoid a foreclosure will file a Chapter 13 bankruptcy. A Chapter 13 doesn't actually wipe out the debt, serves to temporarily shield debtors from their creditors until a court-ordered repayment schedule can be worked out.
"It's intended for somebody who had a loss of income or a short-term decline in income," Ebert explained.
Once a Chapter 13 filing occurs, all debt collection efforts are halted for several months during what is called a forbearance period, during which a court will work out terms for repaying the debt. Usually, the court will set up a schedule over three to five years over which the debtor will repay the arrears, or debt owed.
Need to be able to maintain payment schedule
For a Chapter 13 to successfully avert a foreclosure, a homeowner must be able to pay off the arrearage while at the same time resuming his or her original mortgage payments - which can be a hefty financial burden. Otherwise, the property will soon fall back into foreclosure.
Ebert said it may be possible in some cases to work out a loan modification as part of the bankruptcy, thereby reducing the ongoing mortgage payments so the homeowner can more readily handle the burden of paying both the mortgage and arrears.
Another type of consumer bankruptcy is a Chapter 7, which Ebert said is rarely useful in avoiding a foreclosure or loss of other secured property. That's because while a Chapter 7 can wipe out unsecured debts, secured debts are tied to a specific asset - such as a mortgage secured by a home - which reverts to the creditor in a Chapter 7.
More on Good Faith Estimates
Loan worksheets lack protections
An “informal worksheet” spelling out those same terms does not commit the lender to honor them. And in some cases, a lender may have legitimate reasons for offering a worksheet instead of an actual GFE.
For example, a lender may prepare such a worksheet for someone who is inquiring about a loan but has not identified the property they wish to buy or the amount they will need to borrow. Both are needed to complete the GFE, so the lender may complete a outlining preliminary terms based on certain assumptions about the property.
In fact, the lender isn’t obligated to provide a GFE until you actually apply for the loan. And to do that, six pieces of information are required. the borrower’s name, monthly income, social security number (needed to obtain a credit report), the address of the property to be purchased/refinanced, the estimated property value and the loan amount.
Once these six items have been provided, the borrower is considered to have applied for the mortgage and the lender is obligated to provide a good faith estimate within three days.
Some lenders have been reported to use worksheets that closely resemble a GFE but have different titles or state “this is not a Good Faith Estimate” in tiny, obscure lettering. Make sure the form you receive is the actual GFE issues by the U.S. Department of Housing and Urban Development. Lenders may not substitute a worksheet for a GFE, nor can they refuse to offer a GFE to an applicant who
Certain terms allowed to vary
Also, be aware there are certain changes that are allowed under the GFE – third party fees can vary by up to 10 percent, as these are not under the control of the lender, and the GFE may spell out options you can select that may change your lender fees and interest rate, such as paying points to obtain a lower interest rate.
Some lenders have criticized the new GFI for not allowing them to spell out in detail the fees they charge and what they’re for, claiming that information is needed to fully compare loan offers. However, the GFE does spell out what your total costs will be – and you can always ask your lender to spell them out in greater detail as well. Just make sure that you’re provided GFE as well.
An “informal worksheet” spelling out those same terms does not commit the lender to honor them. And in some cases, a lender may have legitimate reasons for offering a worksheet instead of an actual GFE.
For example, a lender may prepare such a worksheet for someone who is inquiring about a loan but has not identified the property they wish to buy or the amount they will need to borrow. Both are needed to complete the GFE, so the lender may complete a outlining preliminary terms based on certain assumptions about the property.
In fact, the lender isn’t obligated to provide a GFE until you actually apply for the loan. And to do that, six pieces of information are required. the borrower’s name, monthly income, social security number (needed to obtain a credit report), the address of the property to be purchased/refinanced, the estimated property value and the loan amount.
Once these six items have been provided, the borrower is considered to have applied for the mortgage and the lender is obligated to provide a good faith estimate within three days.
Some lenders have been reported to use worksheets that closely resemble a GFE but have different titles or state “this is not a Good Faith Estimate” in tiny, obscure lettering. Make sure the form you receive is the actual GFE issues by the U.S. Department of Housing and Urban Development. Lenders may not substitute a worksheet for a GFE, nor can they refuse to offer a GFE to an applicant who
Certain terms allowed to vary
Also, be aware there are certain changes that are allowed under the GFE – third party fees can vary by up to 10 percent, as these are not under the control of the lender, and the GFE may spell out options you can select that may change your lender fees and interest rate, such as paying points to obtain a lower interest rate.
Some lenders have criticized the new GFI for not allowing them to spell out in detail the fees they charge and what they’re for, claiming that information is needed to fully compare loan offers. However, the GFE does spell out what your total costs will be – and you can always ask your lender to spell them out in greater detail as well. Just make sure that you’re provided GFE as well.
Wednesday, February 10, 2010
Buy and Bail
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.
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.
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.
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.
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 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.
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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