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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.

Is now the time for mortgage refinancing?

August 8th, 2012

On Aug. 2, Freddie Mac revealed in a press release that most mortgage rates had risen slightly during the week leading up to that date. Normally, that would be of little surprise as home loan rates usually bob up and down. However, with rates having fallen or remained at record lows in 13 of the previous 14 weeks, analysts are likely asking themselves: “Is this a bottoming-out? Is the long-predicted rise in rates finally happening?”

Predicting mortgage rates accurately is difficult

It could be months — possibly even years — before they have a definitive answer to that question. In recent years, we’ve seen mortgage rates rise slightly only to fall again to new record lows, the last of which was observed only a week before Freddie Mac’s press release.

The press release showed that current mortgage rates for 30-year fixed-rate mortgages (FRMs) averaged 3.55 percent with 0.7 points that week. At the same time last year, that same rate was 4.39 percent. Back then, even that was seen as unsustainable, and most commentators were predicting significant rises.

Case in point, in its August 2011 Mortgage Finance Forecast, the Mortgage Bankers Association (MBA) predicted that 30-year FRM rates in Q3 (the third quarter of 2012) would average 5.1 percent. The MBA wasn’t alone. Most others thought that was a realistic expectation as well.

Watch trends to time mortgage refinancing decisions

If expert economists specializing in forecasting mortgage rates can get things so spectacularly wrong, what chance do ordinary homeowners have of judging the right time to refinance? The short answer is that choosing the right moment seems to have more to do with luck than judgment.

However, that shouldn’t be an excuse for not refinancing. Those who were reluctant to refinance over the last three or four years because they weren’t absolutely sure they would get the very best deal would, today, probably find themselves thousands of dollars worse off had they acted at almost any time during that period. They were better off for having waited.

Small wonder, then, that the MBA reported August 1 that refinances represented 81 percent of all new home loan activity during weekending July 27. None of those people could be certain that mortgage refinancing rates wouldn’t fall yet again, but they took the chance anyway — and it’s a choice many commentators would regard as very sensible.

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 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.

All-cash deals made up 28 percent of home purchases in 2010

March 4th, 2011

Having enough money to purchase a home outright might seem like a fantasy, but 28 percent of all homes bought in 2010 were all-cash deals, according to a recent Wall Street Journal article. Areas that had more depressed housing markets had more all-cash purchases.

Among the areas that saw a lot of these purchases is Miami-Fort Lauderdale, were over 50 percent of purchases involved cash buyers. About 42 percent of real estate purchases in Phoenix were all-cash deals.

“The prices were just irresistible,” Richard Stoker, who paid cash for two condos in Miami Beach, Fla., told the Wall Street Journal. “Florida’s been hit pretty hard.”

No mortgage loans

Buyers who pay with cash may receive a discount off the price of a home.They also have the freedom that comes with owning a property free and clear of a mortgage. Often people who are able to purchase a house with cash are investors. According to San Diego-based DataQuick, “All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.”

While investors are more likely to do all-cash deal, that doesn’t mean that there aren’t buyers out there who can afford to buy a home without a mortgage. The Money Saving Mom blog describes in a series of articles how one couple scrimped and saved to get the money they needed to buy a home in an all-cash deal. Buying a home with cash isn’t for everyone and requires a lot of sacrifices and careful planning. To determine if it is even possible to aim for the goal of buying a house with cash, you may need to work with a financial advisor to put together a plan.

What if you need a mortgage?

If, however, paying cash is too unrealistic of a goal to achieve, you’ll need to plan for getting a home loan if you want to buy a house. Be prepared to provide plenty of documentation about your income and assets when applying for a home mortgage. You also want to have the best credit possible since many mortgage lenders expect you to have a credit score of at least 720 to qualify for the best mortgage rates.

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.

Home refinance checklist

October 8th, 2010

Current mortgage rates are super low, and many homeowners are rushing to refinance before they begin to rise again. If you’re thinking of refinancing, remember the following things.

  • Shop around to compare mortgage rates from several lenders. Not all mortgage lenders offer the same type of deals. Among the differences in refinance programs you may find are deals that offer low closing costs and bonuses or other incentives for closing on time. Some mortgage lenders may even be willing to waive certain fees or closing costs.
  • Your credit score does matter. The key to being offered the best mortgage rates lies in your credit score. Mortgage lenders want to see a strong credit report that includes a history of paying bills on time, a low debt-to-income ratio, and no judgments or liens. If you have a spotty credit history, take time to repair your credit before going to a lender to apply for a refinance.
  • A refinance could actually increase your monthly payments. That would be the case if you were to choose a 15-year mortgage loan. A 15-year home loan is going to have a lower interest rate than a 30-year loan, but you’re likely to have significantly higher monthly payments with the shorter term.
  • Refinancing into a 15-year mortgage can help pay off your home faster. If you can afford the monthly payments without it being a financial hardship, this could be the way to own your home free and clear of debt sooner.
  • Refinancing can get you out of an adjustable-rate mortgage (ARM). Many homeowners with ARMs fear the day mortgage rates begin to rise because that means they would end up with a higher monthly payment when their loan resets.
  • Be ready to provide documentation for everything. Mortgage lenders want to know how much you earn each month and will ask you for recent pay stubs and your most recent tax return. If you are self-employed, expect to provide an income statement or other information about your business. You also may be asked for proof of assets in savings or investment accounts.
  • Make sure you have enough home equity to avoid mortgage insurance (MI) payments. MI is required when you have less than 20% equity in a property.

Depending upon your situation a refinance could allow you to keep a lot more money in your pocket each month. Refinancing also can shave thousands of dollars off the amount of interest paid over the life of a mortgage loan.

Are mortgages with no down payment making a comeback?

September 5th, 2010

Think no-down-payment mortgages are dead because of the housing crisis? Think again. The Affordable Advantage program run by Fannie Mae has allowed some home buyers to purchase a property with only $1,000 as a down payment. The mortgage loan program helps people with moderate incomes purchase homes, and housing grants can be applied toward the down payment.

Four states pilot mortgage program

Only four states are offering the mortgage loan program at this point: Idaho, Massachusetts, Minnesota, and Wisconsin. An article in the New York Times says the Wisconsin Housing and Economic Development Authority has issued 500 loans since March.

While it may seem risky to issue mortgages with low down payments, some housing experts seem to believe that the program’s requirements can cut the risk of homeowners defaulting. Only 30-year fixed-rate mortgages are available through the Affordable Advantage program. Risky adjustable-rate mortgage loans are not available.

Verifying borrower information

Homebuyers must have a credit score of at least 680 and live in the home purchased. Mortgage lenders also must verify the income and assets of home buyers, something that did not always occur before the housing crisis and contributed to a surge in sub-prime lending.

“In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers,” Kate Venne, spokesperson for the Wisconsin HFA, told the Washington Independent. The program helps borrowers if they become unemployed. Also, there is no requirement for mortgage insurance, which can bump up monthly fees.

Should you apply for a home loan?

If you live in one of the four states and are wondering whether or not to apply for a home mortgage through the program, here are some things to consider:

  • Are you really ready to take on mortgage payments and other expenses associated with home ownership? In addition to principal and interest, you need cash to cover homeowners insurance, property taxes, utilities, routine maintenance, and home repairs.
  • Would you rather save up a larger down payment to lower your monthly housing costs? Remember, the larger your down payment, the lower your monthly mortgage costs.
  • Do you need to clean up your credit to qualify for a home loan through the Fannie Mae program? Being on time with bill payments, reducing debt, and deleting outdated information in a credit report can help raise your credit score.

Finally, consider whether you are willing to buy a home in this economy. Housing prices and mortgage rates are low, making it a good time to buy a home. But home values could continue to fall even after you purchase a property. Honestly assess your tolerance for risk, as well as your commitment to staying in a home that could decline in value if the economy doesn’t improve.

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.