dcsimg
Home >> News >> LoanBlog >> mortgage

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.

Should you get a mortgage if you have bad credit?

March 18th, 2011

Advertisements promising mortgages for those with bad credit are a dime a dozen. But often, the claims are exaggerated and mortgage loan applicants are turned down because they are seen as too big of a risk. When people are approved for a loan even though they don’t have great credit, they end up paying more because of high interest rates. You may be determined to not let having bad credit keep you from getting a mortgage, but should you really get a loan?

Not-so-ancient history

The reason mortgage lenders review your credit history is to determine what kind of consumer you are. Having bad credit is a sign that something in your past and present has kept you from being financially responsible. Maybe you fell on hard times after a job layoff, divorce or major illness in your family. However you got to where you are, money has been handled in a way that indicates that lending money to you at this time might be a mistake.

Questions for you

Getting a home loan is a major financial decision that can really backfire if not handled properly. Ask yourself the following questions before applying for a mortgage:

  1. Are you really ready to take on the payments for the mortgage loan, taxes and insurance? Tax payments are set by your town based upon a property assessment, but mortgage and insurance payments will be affected by your credit score.
  2. Why can’t you wait to buy a home? Are you currently living in a rental and having difficulty keeping up with the monthly payments? Getting a mortgage loan isn’t going to improve that dilemma in most cases. Remember, owning a house means you’ll be responsible for repairs, upgrades, yard work and anything else that comes up.
  3. Why should mortgage lenders trust you to repay a loan? Be honest about your financial behavior up to this point. Have you been dishonest with others and yourself when dealing with bill collectors and creditors? Are you constantly making excuses for why you’re late with payments? Do you tell your kids or other family members to lie to bill collectors when they call? These are signs that you probably are not ready to get a home.

Repair credit before mortgage application

The bottom line is that going through the steps to repair credit can prepare you for getting a mortgage loan down the line. If you need help doing this, find a reputable debt counseling agency in your community.

Should you accelerate mortgage loan payments?

March 13th, 2011

Many Americans have slashed their spending and are doing without in order to pay off debt and lessen the effects of the troubled economy. Paying off mortgage loans early has become more popular, something that many financial experts have traditionally advised against.

Getting free of a mortgage

The argument for accelerating payments on a home mortgage is that you build equity faster and ultimately will own it free and clear of any debt obligation. You will always have the security of knowing that the place is yours as long as you want it to be. Paying off a home mortgage in full also would likely free up a significant chunk of your income, allowing you to have more control and freedom to use it for other purposes.

Using income for other investments

Those who are against accelerating mortgage payments often cite the loss of the mortgage interest tax deduction. They also point out that instead of putting extra cash toward a home loan, the money could be invested in mutual funds or other investments that may earn you more money. Also, during the years when you are accelerating mortgage payments, you may have less income to put toward other things.

Biweekly mortgage payments

Before you starting attacking your mortgage debt for a faster payoff, learn as much as you can about the various methods. Biweekly mortgage loan payments can allow you to pay off a 30-year mortgage about six years ahead of schedule. Instead of making mortgage payments once a month like a lot of borrowers do, you make a payment every two weeks. So instead of making 12 payments a year it works out to 13 payments.

Most mortgage lenders allow biweekly payments, but usually charge a fee to set it up. Skip the fee and set up your own biweekly mortgage payment plan. Check with your mortgage lender to see if you can send half of the payment every two weeks. If the lender won’t allow it, divide the monthly payment by 12 and add that amount to the payment on the principal each month.

Use cash windfalls

Use bonuses and other cash windfalls to pay down mortgage debt. Make sure you don’t need the money for other expenses that are more pressing than paying off a mortgage. For instance, putting lump sums of cash toward credit card debt can wipe out high interest payments, which would give you a better return on your money than paying off low interest mortgage debt.

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.

Report shows African-Americans, Latinos are less likely to receive mortgages

February 24th, 2011

African-Americans and Latinos are less likely to receive mortgage loans as the housing crisis has deepened, according to a recent report from ComplianceTech, a provider of technology and mortgage data analysis for government agencies, nonprofits and financial institutions. The analysis of data from 2004 to 2009 shows that there are disparities in the availability of mortgage credit to African-Americans and Latinos. Members of these groups have more difficulty financing a home regardless of whether they are new home buyers or homeowners looking to refinance.

The sub-prime mortgage crisis

The analysis also debunks the erroneous notion that mortgage lending to minorities was at the root of the sub-prime mortgage crisis. Data in the report show that whites actually received the highest number and dollar volume of sub-prime mortgage loans, and are likely to have more mortgage loans in foreclosure. Whites received 4.1 million sub-prime mortgages between 2004 and 2009, Latinos 1.3 million, African-Americans 1.2 million and Asians 179,000.

The report states:

As the foreclosure crisis threatens the financial stability and mobility of families across the country, it will be particularly devastating to African American and Latino families, who already lag behind their white counterparts in terms of income, wealth and educational attainment. Furthermore, the indirect losses in wealth that result from foreclosures as a result of depreciation to nearby properties will disproportionately impact communities of color.Fewer prime mortgages

African-Americans and Latinos have lower origination rates and higher costs when they are approved for mortgages. Between 2004 and 2009 the market share of prime rate mortgage loans for African-Americans fell 62.67 percent and 61.62 percent for Latinos. The market share of prime rate mortgages grew 12.54 percent for whites and 19.6 percent for Asians.

All racial groups experienced a decline in the volume of prime mortgage loans. African-American prime loan volume plunged to $19.5 billion in 2008 from $82 billion in 2004. Latino prime mortgage loan volume fell to $40.2 billion in 2009 from $171 billion in 2004. Prime mortgage loan volume for whites fell to $876 billion in 2009 from $1.2 trillion in 2004, while Asians saw loan volume decline to $90.6 billion in 2009 from $121 billion in 2004. However, white and Asian borrowers saw increases in prime loan volume between 2008 and 2009, while African-Americans and Latinos experienced declines.

Using a cash windfall as a down payment on a home

February 18th, 2011

Should you use an inheritance or other cash windfall as a down payment on a home? Obviously, the more money you have for a down payment the better. But is getting a mortgage loan to buy a home the best use of your money at this time?

Do you have a lot of debt?

Owning a home is part of the American dream. But it can be easy to rush into home ownership without really being ready for all the financial responsibilities. For instance, many people apply for mortgage loans even though they have a lot of credit card debt, auto loans, student loans and other bills. Take a careful inventory of your finances and decide whether it makes more sense to use a cash windfall to pay off some of your debt, especially high-interest debt like credit cards.

Do you have emergency savings?

Owning a home means that you’ll be responsible for all maintenance and repair costs. It is not a good idea to purchase a home without having money set aside in savings for routine maintenance and other projects that may come up. It is also important to have money in savings for other emergencies that may occur, such as car repairs, medical expenses or a sudden drop in income. If you have little or no money saved up, you may be better off using your windfall to boost savings.

Do you anticipate a large expense soon?

Are you about to send your kid to college or anticipating some other important event that will cost big bucks? Put together a spending strategy that prioritizes future expenses. As you go through the numbers it may become apparent that this is not the time to get a mortgage to buy a home. You also may find that you need to put together a budget so that you can take care of your financial obligations and still save up for buying a place in the future.

Take time to plan ahead

Avoid rushing into home ownership even if you can qualify for a home mortgage. Too many Americans have made the mistake of getting mortgage loans when they really could not afford them. If you need help knocking out debt and building up a savings, get help from a debt counselor. If you do receive a windfall for a significant amount, a knowledgeable financial adviser can help you figure out the best way to handle it.

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.

Cash-in refinances break record in 4th quarter

February 3rd, 2011

More homeowners than ever paid down mortgage loan balances while refinancing their homes in the fourth-quarter of 2010, according to Freddie Mac. During the period, 46 percent of homeowners who refinanced mortgages brought cash to closing to lower their principal balance. That is the highest “cash-in” share since Freddie Mac began tracking refinance activity in 1985.

Paying down mortgages and other debt

Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement:

Consumers are generally shedding debt, and mortgages are just another way they’re doing it. Between 2007 and the third quarter of 2010, mortgage debt declined more than $400 billion, according to the Fed. The estimated volume of net equity cashed out in our report do not account for the homeowners who have paid off their mortgages in their entirety.

Cash-out refinancing

Freddie Mac also reported that the percent of cash-out refinances, in which homeowners cashed out some home equity, fell to a record low. Borrowers who increased their mortgage loan balance by at least 5 percent accounted for 16 percent of mortgage refinancing. The cash-out refinance share has averaged 62 percent over the past 25 years.

Getting a cash-out refinance deal has gotten tougher for many borrowers as the housing crisis has dragged on. Lower home values, high unemployment and tougher lending standards all have put the brakes on the my-house-is-a-piggy-bank mentality that swept America before the housing downturn.

Taking advantage of low mortgage rates

Some savvy homeowners who still have good credit have can use current market conditions to their advantage. Instead of using low mortgage rates to simply lower monthly payments, you can choose to also reduce the amount of principal being refinanced by bringing cash to closing. This strategy can give you a choice of making the new lower payments or continuing to pay down your mortgage faster by sticking with the higher payments you made before refinancing. Either way you end up paying out less interest over the life of the mortgage loan.

When shopping around to compare mortgage loans, let lenders know that you are interest in bring cash to closing to pay down the principal. This could work in your favor and allow you to get a better mortgage rate. Bring cash to closing also could push up your home equity enough to get rid of monthly mortgage insurance (MI) payments.

A quarter of Nevadans who lost homes strategically defaulted

January 28th, 2011

Almost a quarter of Nevada residents who lost their homes to foreclosure walked away from them. A Nevada Association of Realtors (NVAR) Report found that 23 percent of homeowners strategically defaulted on mortgage loans. The report also found that most Nevadans facing foreclosure did not know about federal and nonprofit programs designed to help them.

Many of the people who went through foreclosure had experience at least two “life-altering events” that increase their risk of defaulting on a home mortgage. Losing a job and medical expenses were the most common events that triggered a foreclosure. Also, 46 percent of homeowners blamed banks and lenders for foreclosures, 20 percent blamed the government and 13 percent blamed homeowners.

Residents don’t know where to turn for help

Nevada has consistently had one of the highest rates of foreclosure in the U.S. With so much attention given to foreclosure during the housing crisis, it seems surprising that so many homeowners would be unaware of programs that can help them.

Linda Rheinberger, 2010 NVAR president, said in a statement:

“We think this research will help the public, the real estate industry, lawmakers and others grappling with this difficult issue. Personally, it was striking to see that nearly one in four Nevadans who lost homes to foreclosure admitted that they simply walked away from their mortgage. As for solutions, there may not be a single cure-all, but this report suggests that we can do more to make distressed homeowners aware of the free and low-cost resources available to them.”

Arranging a short sale

Among the alternatives to foreclosure is arranging a short sale. A short sale occurs when a mortgage lender agrees to allow you to sell a home for less than what is owed on a mortgage loan. The mortgage lender is able to recover some of the mortgage loan, and you, the homeowner, get out from under the burden of a mortgage you can’t afford.