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A Change In Mortgage Rates Is Here

A year ago, 30-year mortgages stood at 6.25 percent while rates on 15-year mortgages were at 5.98 percent. Five-year adjustable-rate mortgages averaged 6.00 percent and one-year ARMs were at 5.49 percent at this time a year ago.

Mortgage rates have plunged to levels last seen in the refinance boomlet of 2004. The benchmark 30-year fixed-rate mortgage fell 18 basis points, to 5.57 percent; according to the basis point is one-hundredth of 1 percentage point.

It was the fourth consecutive decline and the straight work that rates have been below the 6 percent level. The new rate marked the lowest point of 30-year mortgages since they averaged 5.40 percent the week of March 25, 2004.

Economists attributed the decline to further weak news on the economy combined with the biggest reduction of a key interest rate by the Federal Reserve in more than 20 years. This is a move that has raised hope the fed will be making more rate cuts as it steps up its effort to combat a threatened economic recession.

When the Federal Reserve cut the target for the federal funds rate by three-quarters of a percentage point, the action was extraordinary in both the magnitude and the time of the rate cut. Other type of mortgages also showed declines the same time.

How Will This Affect Those Desiring to Refinance Their Home?

The drop may encourage up to 7 million homeowners to apply for new mortgages, many to avoid resets of adjustable rates. Lower monthly payments would put more money in their pockets and encourage consumer spending.

An increase in mortgage refinancing will eventually be a game-changer, turning the dynamic on mortgage payments into a positive from a negative. Applications for US home mortgages jumped for a third consecutive week.

Refinancing Will Be Different This Time With Different Hurdles

Refinancing accounted for two-thirds of all applications. Homeowners will face more hurdles this time around in obtaining the loans. With tighter credit conditions we do not know how many of these applications will become loans.

If you can lower your loan to a full percentage on your mortgage, then that’s a good sign to refinance. A note of caution is due here. There will be tighter credit conditions for all to be able to refinance. These unfortunate souls fall into a number of categories.

First, millions of people have jumbo mortgages, home loans for more than $417,000. Jumbos have not yet taken back those rate gains from today’s rates. And they aren’t competitive with the rates they received a few years ago.

Second, sub prime borrowers are having trouble finding loan approvals. They can’t refinance with this situation. And finally, people who bought houses in the last three years in bubble areas, might be unable to refinance unless they have cash on hand because home values have fallen

And last, say you made a 5 percent down payment when you bought the house two years ago and owe more than the house is worth. The lender will not refinance the loan unless you have enough cash down for a payment.

As you can see the rules and possibilities to refinance have changed and it won’t be as easy for people as it has been in the past.

What Is A Short Sale?

The real estate market has hit on some tough times. You may find yourself among the millions of homeowners whose homes have become more worrisome than happy. The short sale of a house is a good method that can help people who are unable to make their monthly payments and need a way out.

A short sale is an agreement by a lender to take less than the principal owed as payment on a loan. The advantage to the lender is that by doing this they can avoid the expense of a foreclosure. Also, the lender really does not want your home, he wants your money.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property.

With a foreclosure, the lender can lose up to 40 percent of the mortgage amount because of the extra costs involved with foreclosing on property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. It is sometimes in the best interest also for the lender to accept the short sale.

How A Short Sale Works

In order to be eligible for a short sale a borrower must prove that they are unable to pay their loan and that a foreclosure is pending. The borrower must find a buyer for their house at a price, which is comparable to the market in the area.

Then they must write an explanation of the situation. Financial information will be requested. Finally if the deal is accepted the lender will write off the unpaid debt. The borrower can later be taxed on the amount as income if no proof of insolvency is provided.

The information required may include:

• W-2s and pay check stubs

• Bank statements

• Hardship letter – this letter will describe the reasons the borrower is in the

• Financial position they are in with all necessary backup proof

• Fair market value for the property

• Listing agreement and purchase agreement

• Preliminary proceeds sheet from the sale of the property

When the lender reviews all of this they may or may not approve the short sale. If they do not approve, they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

The borrower is still not off the hook. The lender has the options to try to collect the shortage and may require the borrower to sign a note to repay the shortage. They may also file a collection for the amount of the shortage.

This is something that an attorney with expertise in this area of real estate needs to be consulted. Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount.

Personal Questions To Ask

The only way to answer this question is to know exactly what is going to take place with our economy in the next two to five years. When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace.

Individuals’ personal finances often experience periods of advance and decline, interest rates rise and fall, and the strength of the economy waxes and wanes.

Then you have to ask yourself:

The more information and financing you have in regards to the above, the easier it will be for you to make the superlative decision.

What Are The Main Differences Between The Two Financing Plans?

Fixed-rate mortgages and adjustable-rate mortgages are the two primary mortgages types. While the marketplace offers numerous varieties within these two main loan types, the first step when shopping for a mortgage is determining which of the two loan types best suits your needs.

The fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. Here the total payment remains the same, which makes budgeting easy for homeowners.

The main advantage of this loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable.

Although the rate of interest is fixed, the total amount of interest you’ll pay depends on the mortgage term. The trade-off for that low payment is a significantly higher overall cost because the extra decade, or more, in the term is primarily to paying interest.

The monthly payment of shorter-term mortgages offers a lower interest rate. This allows for a larger amount of principal being repaid with each mortgage payment, so shorter-term mortgages cost significantly less overall.

The interest rate for an adjustable-rate mortgage varies over time. The initial interest rate on the type of loan is set below the market rate on a comparable fixed-rate loan, and then the rate rises as time goes on.

If the adjustable-rate is held long enough, the interest rate will surpass the going rate for fixed-rate loans. These loans have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged time.

This initial rate can vary significantly anywhere from one month to 10 years. Also, this initial rate enables the borrower to qualify for a larger loan and allow for a lower interest rate to begin with.

The downside is your monthly payment may change frequently and if you take on a large loan, you could be in trouble when interest rates rise. Some of these loans are structured so that payments can nearly double in just a few years.

The home-loan dilemma continues to be personal and influenced by our economy.

The Advantages Of A 40-Year Mortgage

The housing market has become so stretched that the affordability ratio for first-time buyers has deteriorated to levels last seen in the third quarter of 1989. Bids evaporated and new home sales dropped 20% in response to the situation at that time.

Sky-high prices are not preventing cash-strapped consumers now from getting the house of their dreams because lenders are letting them drag out the term of their mortgages to 40 years. By doing so borrowers can stretch out loan payments and qualify for larger mortgages with lower payments.

With house prices soaring, the 40-year fixed-rate mortgages was created by several California savings and loan associations and can now sell loans to Fannie Mae, the nation’s largest mortgage finance company.

Real estate brokers and lenders say consumers are being resourceful in taking out 40-year loans when double-digit home price appreciation has become the norm.

Most borrowers do not plan to live in the house for 20 years, so a long term is of no consequence. They figure to sell in about seven to ten years having many years left on the term of the loan remaining anyway.

The primary advantage of a 40-year fixed-rate mortgage is making monthly payments more affordable without taking on the risk of an adjustable rate. In addition to buyers in high-cost areas, the 40-year fixed mortgage also appeals to buyers with small down payments.

Reducing the monthly payments on large loan amounts is accomplished by stretching the repayment term by an extra 10 years. And you might save a hundred a month over those decades on the smaller monthly house payment.

The Disadvantages Of A 40-Year Mortgage

Many financial advisers, attorneys, and mortgage-consulting firms are more than concerned about the new 40-year loan.

Some of this effect of lower monthly payments is negated by a higher rate that is charged on the 40-year loan. Rates on a 40-year fixed are often one quarter to one half of a percentage point higher than a traditional 30-year fixed-rate mortgage.

Loans with longer terms carry higher rates because of the added time frame where a default may occur and because lenders seek compensation for the longer period of time that their money is tied up.

Another disadvantage is that the homeowner builds equity at a snail’s pace. For a buyer looking to eventually move up to a larger home, this slow pace of equity accumulation is a liability.

Even with the very same rate on a 30-year as a 40-year mortgage savings are negligible. A $200,000 mortgage financed for 30 years at a fixed rate of 5.75% would carry a monthly payment of $1,167.15.

By stretching the loan term an additional 10 years, even at the identical interest rate, reduce the monthly payment by $100, to $1,065.78, the borrower also would have $16,389 less in equity at the end of the first decade of payments and would have paid an extra $4,200 in interest.

This all stems from affordability and borrowers stretching themselves beyond their reach to get into a home they can’t afford. What’s next, a 50-year loan? When housing cools, so will these 40-year loans.

A New Way To Pay Off Your House

Accelerator loans, which are common in Australia and in the U.K., have just recently come to the United States. These special accounts encourage borrowers to apply all extra money toward their mortgages and the savings can be big.

The premise is that borrowers finance a purchase or refinance existing property using home-equity lines of credit. Borrowers then directly deposit their entire paychecks into the credit accounts.

Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit, whether those are through automatic bill payments, checks, cash withdrawals or credit cards.

Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.

How Does It Work?

Let’s say that your mortgage payment is a conventional fixed-rate mortgage at $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.

That’s because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75 percent loan rate, that saves you about $10 in interest expense that month.

Beginning with $10 here and there it adds up over time. Although both loan programs have annual fees of $30 to $60, the accelerator part of the mortgage lies in having all of your net pay going against the mortgage.

A Home Ownership Accelerator loan could also be used instead of taking out a reverse mortgage. With enough equity in the property, a homeowner could avoid minimum payment over time using negative amortization up to the amount of the home-equity line of credit.

Closing costs on a mortgage accelerator loan are about equal to the closing costs on a conventional 30-year fixed-rate mortgage. Like any refinancing decision, those costs are a factor, and the longer you plan to be in the house the easier it is to justify refinancing your mortgage loan.

Lenders expect homeowners to be less rate-sensitive about these accelerator mortgages because of the interest savings available through the program. The product is new enough in the U.S. market that it will take some time to validate that expectation.

How Is Your Discipline?

If you have the discipline you could be doing the same right now with a conventional mortgage or really with any mortgage and without the cost of refinancing. A borrower would simply need the financial discipline to use that money as an additional principal payment.

If you would just put an extra $100 to $300 or more on your monthly payment (depending on your financial situation that month) you could have the control of changing your 30-year loan down to a 20, 18, 16 or whatever you choose.

Homeowners could put together a payment plan similar to a mortgage accelerator on their own without any extra expenses. Interest savings are still available the old-fashion way by making these additional principal payments on any type of loan.