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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.

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.

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.

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.

3 ways to cut your mortgage costs

September 10th, 2010

Buying a home is probably the biggest purchase you’ll ever make. Like most people you probably don’t have enough cash on hand to buy a property outright and need to obtain a mortgage loan, which means you are committing to many years of loan payments.

Most mortgage loans are set up to be paid out over a long period of time, such as 30 years, and the interest payments result in paying a whole lot more than the actual purchase price of a property. For instance, if you use a mortgage payment calculator to determine the amount of interest paid on a 30-year fixed mortgage loan for $200,000 at 4.5% interest, you’d pay $164,813.42 in interest over the life of the loan.

Cut Mortgage Costs

So what can you do to decrease the amount of money paid out of your pocket over the life of a home mortgage?

  1. Save up a larger down payment. This probably isn’t the first time you’ve heard this piece of advice, but you really can’t afford to ignore it. Using the scenario described above, assume that the down payment on the mortgage is 20%, or $40,0000. The total amount of interest paid out over the 30 years would be $131,850.74. Boost the down payment to 30% ($60,000) and the amount of interest paid would be $115,369.40. The more you put down the less interest you pay and the smaller the monthly payments are going to be.
  2. Property taxes and homeowners insurance add to monthly mortgage costs. Shop around for the best homeowners insurance policy you can find. Mortgage lenders require insurance premiums to be paid into an escrow account each month. Take time to compare different policies to find the best one for your situation. It may make sense to increase the deductible to have smaller monthly payments. You also may get discounts for being a long-time customer, having multiple policies, or not filing any claims over a certain period of time.
  3. Pay extra toward the principal. Even if you can only spare $50 extra to put toward a mortgage loan each month, do it. Paying down principal faster than the term of the loan can significantly cut your total mortgage bill. If owning your home free and clear of mortgage debt is important, focusing on reducing principal can help.

Refinance to lower payments

Also consider taking advantage of current mortgage rates to refinance out of a high-interest home loan. Decreasing your monthly payments could save hundreds of dollars a month, allowing you to keep more of your take-home pay. You also could refinance and continue paying the same amount each month to reduce principal quicker and cut the total amount of interest paid out over the life of the 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.

FBI Plans Crackdown on Mortgage Fraud

June 12th, 2010

Hundreds of people are expected to be arrested next week in a nationwide crackdown on mortgage fraud. The Financial Times reported that the Federal Bureau of Investigation (FBI) plans to make the arrests next week.

Lying on Mortgage Loan Applications

Among those expected to be arrested are people who encourage borrowers to lie about income on home loan applications, mislead homeowners about mortgage rescue programs, and inflate home appraisals. A spokesperson for the FBI would not comment to the Financial Times about the expected arrests.

Rampant mortgage fraud helped contribute to the housing crisis. The FBI has opened 23 mortgage fraud tasks forces around the U.S. since 2008.

Signs of Mortgage Fraud 

So what are some of the signs that you might be a target of mortgage fraud?

  • Do not trust mortgage brokers who use high-pressure sales tactics. You should never be forced to sign papers for a home loan. A reputable mortgage broker should encourage you to take  time to fully understand different offers from mortgage lenders.
  • If you are asked to lie on a mortgage loan application, find a different broker. You should never exaggerate income or assets to qualify for a home loan. If you know that you cannot afford a particular mortgage but your broker manipulates the numbers to make it look like you can, it’s probably a scam.
  • Do not trust strangers who promise to save your home from foreclosure. Among the red flags is being asked to sign over the deed to you home. Never believe promises that sound too good to be true, especially if you don’t know the individual making them.
  • Some scam artists try to inflate home appraisals to get approved for a refinance or new home mortgage. You can get a comparative analysis of homes from a reputable real estate agent to get an idea of what properties are worth in your area. If an appraisal comes in significantly higher than that, there may be a scam brewing.

Choose Reputable People 

Mortgage fraud is often perpetrated by people who work in the housing industry. That’s why it is important to thoroughly check out any professionals you are considering working with. Ask people you trust to recommend real estate agents, mortgage brokers, mortgage lenders, home appraisers, inspectors, and attorneys.

Mortgage Rates Are Low for Refinance and Purchase

May 24th, 2010

If you were expecting mortgage rates to begin rising this year, you may have to wait a while longer. Current mortgage rates are surprisingly low, with 30-year fixed-rate home loans averaging 4.86% and 15-year rates averaging 4.24%. Many economists had expected mortgage rates to rise to around 6% this year, but the European debt crisis has resulted in investors pouring money into American bonds, which has helped lower mortgage rates.

Time for a Home Refinance?

The lower mortgage rates mean you can still get a good deal on a refinance. “It’s another very good opportunity for anyone who hasn’t yet been able to refinance — or has missed other chances,” Keith Gumbinger, vice president of HSH Associates, told MarketWatch. “Rates have unexpectedly returned to near 50-year lows due to the overseas mess, but it’s worth noting that such sudden declines have proven fleeting in the past, with rates bouncing higher just as soon as a permanent (or potentially permanent) solution has been identified.”

Get a Mortgage to Buy a Home

Current mortgage rates are also good news for people applying for a loan to purchase a home. Getting pre-approved for a mortgage loan can improve your chances of having an offer for a house accepted by the sellers. Some real estate agents won’t even work with you unless you have a letter from a mortgage lender that shows you have been preapproved for a home loan.

You can search for mortgage rateshere to get started on the process of getting preapproved. Getting a preapproval letter doesn’t mean you have to actually apply for a home loan with a particular mortgage lender when you are ready to buy. Any preapproval you get probably expires in about three months time, but you may be able to get an extension if necessary.

Documentation Is Important

 Whether you want to do a home refinance or buy a house, you need to provide documentation of your income to mortgage lenders. You need to show proof that you are employed or have a steady income. Mortgage lenders also want to know that you aren’t carrying too much debt relative to your income. Among the financial documents you might have to provide are tax returns, W-2 statements, bank account statements, and recent pay stubs.

Don’t Waith Too Long

Current mortgage rates are very attractive if you want to refinance or buy a home. But don’t expect mortgage rates to remain at such low levels for the long-term. Get moving if you want to lock in a mortgage deal before interest rates begin rising.