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Crazy to take an adjustable-rate mortgage? Crazy like a fox

November 14th, 2012

Conventional wisdom states: Current mortgage rates are close to record lows and, given that eventually they’re pretty much bound to rise, you’d be mad not to choose a fixed-rate mortgage (FRM) that locks your interest rate for the term of your home loan. True for many, but not for everyone — maybe even fewer people than you’d think.

The alternative is an adjustable-rate mortgage (ARM), and most of these are “hybrids.” You may have read about 5/1 ARMs or 7/1 ARMs, and that five or seven represents the number of years during which the initial mortgage rate is fixed before it floats up (or, much less likely, sinks down) to whatever rate is then current. It’s a hybrid of an FRM for the first x years, and an ARM after that.

Home loans should match your plans

It’s usually more advantageous to choose the type of home loan that matches your plans. If you want to apply for a mortgage — or refinance an existing one — on a home you plan to remain in indefinitely, then an FRM makes perfect sense. A quick glance at Freddie Mac’s archive of 30-year FRM rates confirms how much they can go up and down over the term of a loan.

It’s a no-brainer for those settling into their home for decades: fix your rate with an FRM. In the unlikely event interest rates fall by a significant amount, you still have the mortgage refinancing option. But what if you’re likely to move in a few years?

ARM yourself if you’re a frequent mover

According to the U.S. Census Bureau: “In 2010, 37.5 million people 1 year and older changed residences in the U.S. within the past year.” That’s 12.5 percent. So even during a recession, Americans moved on average once every eight years. Look online, and you’ll likely find once every five or seven years frequently quoted.

That’s no surprise. People tend to start off in small houses or apartments and buy bigger homes as kids come along, elderly dependents move in, or they become wealthier and trade up. And, of course, many have to relocate frequently for employment. These people should perhaps explore hybrid ARMs.

Current mortgage rates lower for ARMs

That’s because the initial mortgage rates for these home loans tend to be much lower than those for FRMs. Take weekending October 26, 2012. According to the Mortgage Bankers Association, the rate for 30-year FRMs averaged 3.41 percent, with points of 0.76 (including the origination fee) for 80 percent loan-to-value loans. The equivalent average 5/1 ARM rate was 2.66 percent with points of 0.33.

Of course, if your plans change and you stay put, you might regret opting for an ARM when its initial fixed rate expires. But you may regret even more paying unnecessarily high rates when you’re packing your moving van in five or seven years’ time. Those are risks only you can weigh up.

Peter Andrew

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

Do current mortgage rates and housing indicators make this a perfect time to buy?

October 5th, 2012

Until recently, there have been four main reasons people have avoided either buying their first home or trading up to a better house:

  1. They think mortgage rates could go still lower, and have adopted a wait-and-see policy.
  2. They don’t want to buy an asset that’s likely to depreciate in value, and house prices have been falling.
  3. Their current home loan is “underwater” (their home is worth less than the amount they owe on their mortgage).
  4. Their credit score is so damaged they can’t get a mortgage.

Today, all those factors are turning around very quickly and it begs the question: Will there ever be a better time to buy a home?

Current mortgage rates at all-time lows

At the time of writing, current mortgage rates have hit an all-time low. By the time you read this, they may have moved up or down very slightly, but it’s highly likely that you could get a home loan at rates your parents would never have dreamed possible.

Freddie Mac reports that 30-year fixed-rate mortgages averaged 3.36 percent with a 0.6 point during weekending October 4. That compares with 3.94 percent this time last year. Could they go down further? Who knows, but last week they were 3.40 percent. In any event, it seems unlikely they could fall by much and, if they do, you could always refinance.

House prices recovering

After years of traumatic falls, house prices are finally showing signs of a sustained recovery. On September 25, Reuters reported that home prices across the country rose in July for the sixth consecutive month. The report went on: “Six years after its collapse, economists believe the housing market has turned a corner.

One million+ fewer homes underwater

Also in September, CoreLogic published data that showed that 1.3 million American mortgages that were underwater at the end of 2011 “surfaced” during the first six months of this year. That’s a whole lot more people who can now purchase or refinance, and that could well boost the growth in property prices.

Credit scores improving

In yet another September report, Experian, one of the big-three credit bureaus, showed that the creditworthiness of Americans is slowly improving. The average Vantage credit score across the country is now up to 750. Again, this expands the pool of people who stand to be approved for mortgages, which could also help fuel the housing market recovery.

Is now the time to make your move?

Of course, you may be one of those whose home loan is still underwater and/or whose credit score remains badly damaged. However, if you are in a good position and have been putting off buying your first home or trading up, you may see these trends as a unique opportunity. You could now have a chance to cheaply buy an appreciating asset at an incredibly low mortgage rate. Wait, and you may find the best bargains gone and home loan rates rising again.

Of course, if there’s one thing we’ve learned in recent years, it’s that there is no such thing as certainty in financial matters, and trends can quickly reverse. Nevertheless, these indicators point to an exceptional opportunity for home buyers right now, making the thought of acquiring that dream home irresistible.

Peter Andrew

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

Getting rid of a troubled home loan

February 11th, 2011

Are you desperate to get rid of your mortgage problems? You are not alone. Zillow recently reported that 27 percent of U.S. homeowners are underwater on mortgage loans. There also were 261,333 foreclosure filings in January, according to RealtyTrac.

But homeowners dealing with foreclosure and underwater home loans aren’t the only one struggling. Some borrowers are struggling to make monthly mortgage payments due to a drop in income, job layoff, illness or some other factor beyond their control. There is no easy solution to dealing with mortgage problems, but there are several options to consider.

Sell your home

Getting rid of a mortgage loan is the best option if you really can’t afford to make the payments. Just because you sell the property you currently live in doesn’t mean you won’t be able to purchase another home in the future. Find out what’s going on in your neighborhood in terms of home sales. If there have been a lot of foreclosures, the value of your home is likely to be affected. But even if you are underwater on a mortgage loan that doesn’t mean you have to give up the idea of selling. But you may have to consider a short sale.

A short sale occurs when the mortgage lender agrees to accept a lower payoff that what you owe on a home loan. The advantage to doing a short sale is that the lender can recover some of what’s owed. You would be able to get out from under a troubled loan and avoid foreclosure. Keep in mind that any mortgage debt that is forgiven by the mortgage lender in such a deal may be taxable, so it’s important to consult with a tax advisor.

Mortgage refinancing

Maybe you are feeling pinched by monthly mortgage payments, but things haven’t gotten so serious that you are about to lose you home. If you still have some home equity and good credit, you might qualify for a mortgage refinance. The more equity you have and the higher your credit score the better. Refinancing could be the right move it you are paying interest that is much higher than current mortgage rates. A mortgage payment calculator can help determine how much money you could actually save by refinancing.

These are just a few ways to get out from under expensive mortgage payments. There may be other solutions that suit your financial needs. Talk with your mortgage lender or a housing counselor to learn more about your options.

Should you get a home loan or keep renting?

December 31st, 2010

The state of the nation’s housing market is a frequent topic of discussion. Stories about mortgage rates, home prices, and foreclosures often lead the day’s headlines. If you are a renter you may be wondering if the time will ever be right to buy a home. Regardless of what happens with the broader economy, here are four questions to ask yourself when deciding whether or not to make the leap into homeownership.

  1. Have you paid down debt? Or do you still have a lot of debt from credit cards, student loans, auto loans and other types of financing? When you apply for a home loan your finances are scrutinized by mortgage lenders. One of the factors they are going to focus on is your current debt-to-income ratio. So if you seem to be struggling to pay all the bills with your current debt level, it’s unlikely you are going to get approved for a mortgage. Work on tackling that debt before getting serious about shopping for a mortgage loan.
  2. Do you have a hefty down payment? The more you have saved up for a down payment, the better off you are. When you make a down payment that decreases the amount of principal you have to finance with mortgage loan. Aim for a down payment of 20 percent of the purchase price to avoid mortgage insurance (MI) payments. While there are mortgage loan programs for buyers who don’t have a 20 percent down payment, do yourself a favor and take the time to save as much money as possible.
  3. Can you afford a home? Do you have enough income to cover all the expenses related to owning a home? In addition to monthly mortgage payments for principal and interest, you’ll pay for homeowners insurance and property taxes. Depending upon the community to live in there may be monthly dues. There also will be expenses for routine maintenance and repairs, yard care, snow removal, etc.
  4. Is it a smart move? Are you likely to move anytime soon because of a job change? If there is a good chance that you may have to move soon, buying a home at this time may not be the right move for you. If you’re refinancing, it’s important to look at how long it will take to recoup the closing costs involved with refinancing a home mortgage. Ideally, you would want to remain in the home for at least that amount of time.

Making the move to homeownership is a big step. While current mortgage rates may have you chomping at the bit to get a home loan, it’s important to make sure that your finances can really handle everything that is involved.

Mortgage rates are up so should you apply for a loan now?

December 17th, 2010

Mortgage rates have risen over the past few weeks, contributing to a decline in mortgage applications. The average rate on a 30-year fixed mortgage was 4.83 percent this week, compared with 4.61 percent last week, according to Freddie Mac. This rate was 4.17 percent in November, the lowest point recorded by Freddie Mac since it began tracking rates in 1970.

Historical mortgage rates

Have you been dragging your fee about applying for a mortgage refinance or a loan to purchase a home? If so, don’t panic. While mortgage rates have risen during the past few weeks they are still near historic lows. For instance, if you had applied for a mortgage in October 1981, 30-year fixed-rate mortgages were averaging 18.45 percent, according to HSH Associates. Even as recently as 2008, mortgage rates rose above 6 percent.

Improve your profile as a borrower

Mortgage rates can change at any time, but that’s no reason not to shop around to find a good deal. Take steps now to make yourself a more attractive candidate for refinancing or a new home loan. Use the following tips to improve the chance of getting a mortgage:

  • Clean up your credit. Read your credit reports to find inaccurate or outdated information. Contact the credit reporting agency and creditors to clear up any mistakes. Do not wait until you are about to apply for a mortgage loan to do this.
  • Pay off as much debt as possible. Not only do credit cards have high interest, but having too much debt from them can keep you from getting approved for mortgage refinancing or a loan to purchase a property. The less high-interest debt you have, the more income you can put toward monthly mortgage payments.
  • Save as much as possible. Whether you are trying to refinance or buy a home, your ability to bring more cash to the closing can improve your chances of getting a loan. When buying a property, the larger the down payment, the less your monthly payments on a mortgage. If you are refinancing, bringing cash to closing–a cash-in refinance–can boost your home equity, making you a more attractive loan candidate to mortgage lenders.

Shop for mortgage deals

Mortgage rates may continue to climb, or they may fall again. You can’t time the market, so it’s not really worth it to try. If you really want to get a home loan to purchase a property or refinance, go ahead and do what you need to do to qualify for the best loan.

Fix Your Credit Score Before Applying for a Mortgage

August 19th, 2010

Do you need to improve your credit score to qualify for a mortgage loan? Whether you want a mortgage to refinance or purchase a home, it’s important to straighten out your finances before filling out a loan application. Here’s what you need to do.

  • Ditch credit card debt. This is one of the smartest things you can do to boost your credit score. Mortgage lenders won’t approve you for a home loan if your debt-to-income ratio is too high. Debt payments should account for no more than 36% of your income, and mortgage debt shouldn’t be any higher than 28% if you expect to qualify for the best mortgage rates.
  • Pay your bills on time every month. Consistently being late with bill payments lowers your credit score. Read your monthly statements carefully so that you are aware of the date and time that payments are due. Payment history accounts for 35% of a FICO score.
  • Avoid running up balances on existing credit cards or lines of credit. Even if you have enough income to pay off your debts at the end of the money, running up credit lines may mark you as a credit risk with mortgage lenders. Put the kibosh on new purchases at least until after you get approved for a mortgage.
  • Check your credit report for errors. It’s not uncommon to find inaccurate or outdated information on credit reports. Dispute any problems that you find with the credit agency by calling and following up with a letter. If necessary, contact creditors to straighten out problems. Review your report again after your dispute has been settled to make sure everything has been updated.
  • Keep your oldest credit lines open to show that you have an established credit history. While it makes sense to close unused credit lines if you don’t want to be tempted by them because of a history of overspending, wait to do so until after you get a mortgage. If you’ve had a long history of managing credit well, it can help lift your credit score.

Free Credit Reports

Request a free copy of your credit report at www.annualcreditreport.com. You can get one free copy every 12 months from Equifax, Experian, and TransUnion. Review it carefully and take time to fix any problems in order to qualify for the best possible deal on a home loan.

5 Things to Remember When Refinancing

March 12th, 2010

According to Freddie Mac data, mortgage rates averaged 4.95% for 30-year loans, and 4.32% for 15-year mortgages.

How Long Can Mortgage Rates Remain Low?

Current mortgage rates are near historical lows, but some housing experts believe rates may begin to rise this year. It is unclear what may happen to rates. However, you still have time to take advantage of low mortgage rates by refinancing, so keep the following things in mind as you shop for a loan:

  1. You can’t time mortgage rates. Interest rates fluctuate all the time, so it’s difficult to predict with certainty which way they are headed at any given point in time. If you shop around for a refinance deal, consider asking your mortgage lender to lock in your rate. In most cases you must pay a fee to lock in a mortgage rate for a specific period of time, which is usually about 60 days
  2. Don’t assume that your current mortgage lender has the best refinance deal. Shop around and compare deals for mortgage refinancing. The good faith estimate (GFE) can help you compare apples-to-apples. Let your current mortgage lender know about other offers to see if they can match them or give you a better deal
  3. You could end up paying mortgage insurance (MI) if your property value has fallen significantly. If your home appraisal leaves you with less than 20% equity, expect to pay for MI. You can avoid MI by using any money you have saved to make a one-time payment at closing to boost your home equity
  4. If you don’t have a title insurance policy to protect yourself, now is the time to get one. Title insurance is issued to protect your mortgage lender against problems that may be related to the property title. In many cases, you have to ask for an owner’s title insurance policy that protects you
  5. Unless you are desperate to raise cash, it’s probably not a good idea to cash out equity when you refinance. With housing values still falling in many areas, you may want to hold on to as much equity as you can

Consider refinancing if you are struggling to make your monthly payments, have a high interest rate, or have an adjustable rate mortgage. However, refinancing your mortgage may not make sense if you plan to sell your home soon, or already have a low mortgage rate. Use a loan calculator to determine if refinancing can save you money.

Getting Help with Mortgage Loans

November 20th, 2009

Many homeowners who have trouble making mortgage payments turn to savings and investment accounts for funds. But some financial experts recommend that homeowners seek help from mortgage loan modification or refinance programs before depleting their savings or ending up in foreclosure, according to a Consumer Reports article. 

Keeping money in a savings account can allow you to have access to cash in the event of an emergency. Here are some things to remember about getting help with your home loan.

Mortgage Loan Modifications

The government’s Making Home Affordable program has helped about 650,000 homeowners modify mortgages since February. That’s about 20% of the people who are eligible for help through the program.

If you are struggling to stay current with mortgage payments or are already behind on payments, you could qualify for a home loan modification. You also must:

  • Have a first lien that originated on or before Jan. 1, 2009
  • Have monthly mortgage payments (including taxes and insurance) greater than 31% of of your monthly gross income
  • Be able to document that you are having trouble making mortgage payments because of a financial hardship

Even if you don’t have a mortgage loan guaranteed by Fannie Mae or Freddie Mac, you could qualify for assistance. Contact your mortgage loan service to find out if you qualify for help. Mortgage modifications last for a three-month trial period, but are supposed to be extended for five years if you make the payments on time.

Refinance to Lower Mortgage Rate

Mortgage rates are very competitive right now if you want to refinance. Even if you’re home has lost some value during the housing crunch, a mortgage refinance isn’t impossible.  You may qualify for a refinance if:

  • Your home loan is owned or guaranteed by Fannie Mae or Freddie Mac
  • You are current on your mortgage payments
  • The amount you owe on your first lien doesn’t exceed 125% of the current market value of your property
  • You have income to make payments after mortgage refinancing

Lowering Monthly Payments

Even if there is a second lien on your home, you could qualify for a refinance. If you currently have a high mortgage rate, refinancing should lower your monthly payments. However, if you currently have an interest-only loan and refinance into a fixed-rate mortgage, your monthly payments may not decrease. But refinancing should result in an overall savings over the life of the mortgage loan.

When seeking help with a mortgage loan it’s always best to contact your loan servicer directly. Avoid using companies that offer to modify your mortgage for a fee that is paid upfront.

10 Things to Consider about Doing a Mortgage Refinance

October 5th, 2009

Current mortgage rates have fallen near record lows, but should you move to do a mortgage refinance? Here are 10 things to consider if you’re thinking about refinancing.

  1. Consider a 15-year mortgage if you have a low balance. Fifteen-year mortgage rates averaged 4.36% last week, the lowest rate since Freddie Mac began tracking the rates.
  2. Consider paying points to get a lower mortgage rate. Generally, you can lower your mortgage rate by about 0.25% for each point you pay.  Each point will equal 1% of the total amount of your mortgage.
  3. Use a loan calculator to figure out what your monthly payments will be after refinancing. A loan calculator also can show the break-even point for recouping fees paid to refinance.
  4. Check out home values in your area before applying to refinance a mortgage. This will keep you from being surprised by a low appraisal during the refinance process. Keep in mind that if you live in an area hit by a lot of foreclosures, it may be difficult to get a high enough appraisal to refinance if you don’t have a lot of home equity.
  5. Don’t apply for a mortgage refinance until after you’ve reviewed your credit report. Make sure all information on your report is accurate. If you have a poor credit history, you may be turned down for refinancing.
  6. Don’t apply for other types of credit before getting approved for a mortgage refinance. Too many credit inquiries or newly opened lines of credit are red flags to mortgage lenders.
  7. Ask mortgage lenders to provide a Truth-in Lending Disclosure and Good Faith Estimate before paying an application fee or a rate lock-in fee. Some lenders may balk at doing this, but anyone who wants your business should be able to give you this information.
  8. Make sure you continue making payments on your current mortgage. You are still responsible for the payments until you close on the refinance.
  9. Comply with the mortgage lender’s request for documentation of income, income taxes, financial statements, etc. Dragging your feet on getting these documents together can delay closing on your home loan.
  10. Just because mortgage rates are low doesn’t mean you should refinance. Talk with an experienced mortgage counselor if you need help deciding whether or not refinancing will help you.

Countdown to Your Mortgage Closing

If you do refinance your mortgage, be patient. Mortgage lenders have been overwhelmed by requests for loan modifications and refinancings so it make take a little longer than you want to get to closing.

Should You Pay Points on a Mortgage Loan?

September 23rd, 2009

Current mortgage rates have declined to an average of about 5% for a 30-year mortgage, pushing some homeowners to refinance or apply for a new home loan. If you have a good credit score you’ll likely qualify for the best mortgage rates. But even if you don’t have that great of a score you can pay points on a loan to lower your mortgage costs.

What Are Points?

Each point equals 1% of the amount of your mortgage. So for a $250,000 mortgage  a point would be equal to $2,500. Depending upon the loan, you could choose to pay several points. How many points you pay usually depends upon things like how much of a down payment you have. Read the rest of this entry »