Mortgages & Refinancing

Homeowners refinance at lower mortgage rates

Good article in the sacramento bee on Jan. 11 th talking about the lower mortgage rates - check the full

Excerpts: 

As 2009 opens, the "refi" chase is on in neighborhoods across the country and across the region.

This new suburban sport was launched by mortgage rates that in recent weeks have fallen to lows not seen in almost four decades, offering potential to shave millions of dollars in debt from Sacramento-area households. Thirty-year fixed rates are suddenly floating in a zone of 5 percent and below – before fees – bringing a rush of curiosity and applications, area mortgage brokers, bankers and credit unions say.

It's still not clear if lenders will be as willing to play the game as borrowers. Tightened credit rules, diminishing home values and other economic factors will have a big effect on how many actual refinancings take place.

The catalyst is Federal Reserve action to buy $600 billion in mortgage debt from government mortgage giants Freddie Mac and Fannie Mae, analysts say. The government intervention aims to make mortgage funds cheaper and more plentiful to help revive the nation's battered economy...

Yet for all the reported frenzy, it's still too early to tell if there is – or will be – a 2003-like refinance "boom," said Terry Halleck, president and chief executive of Sacramento-based The Golden 1 Credit Union.

"The past couple of weeks, applications have gone up about 300 percent from a year ago. It's huge. The real question is whether people will complete the loan or are just rate-shopping," she said.

The lack yet of a real boom is partly because many homeowners still believe rates may go lower as the economy weakens. And unlike 2003, many borrowers won't qualify for today's tightened credit rules.

"I had to jump through every hurdle on my loan," said Fernandez, who is moving back to Houston. "They're really scrutinizing people."

Other owners also lack adequate home equity to refinance. And today's lower rates only apply to loans under $474,950 in most of the region.

But so many homeowners are browsing, Halleck said, that Golden 1 is starting an application fee "to filter out the people who aren't serious."...

"The likelihood is that low mortgage rates are not a flash in the pan. They will be with us for much of 2009 as the Federal Reserve pumps money into the mortgage market over a period of time rather than all at once," said Greg McBride, a senior financial analyst at financial Web site Bankrate.com.

For households that qualify, this is the upside of the worst financial scare since the Great Depression. Many will shed thousands of dollars in long-range interest and free up personal spending money.

Fed Cuts Interest Rates

Bankrate.com took a look to determine if the Fed's moves made you a winner or a loser. Here's a look at mortgages:

Winner: ARM holder or shopper
The decision by the Federal Open Market Committee (FOMC)
to cut rates by 25 basis points could be a boon for homeowners with adjustable-rate mortgages. It could mean your rate will go down, or at least not rise as much as it would have, the next time your mortgage resets.
Keep in mind the Fed already trimmed the federal funds target rate
by 50 basis points in September. The Fed's latest decision could cause your payment to take a dip if your mortgage resets within the next few weeks or months. Prospective homeowners shopping for an ARM also should find more attractive rates.

Winner: Fixed-rate shopper
It remains to be seen whether the decision by the Fed will help people shopping for new fixed-rate mortgages. Sometimes, fixed-rate mortgages move in tandem with short-term interest rates, but other times they do not.
The Fed's rate cut will have no impact on people with existing fixed-rate mortgages unless they are considering refinancing into a new mortgage, in which case it might help.

Take action
Now is a great time to take out a mortgage. Fixed-rate mortgages remain low by historic standards, and adjustable-rate mortgages are less likely to rise significantly now that the Fed is in a rate-cutting mode.

Mortgage Rates Drop, Applications Drop

Mortgage applications dropped last week, reflecting weaker demand for home purchase loans even as interest rates fell, an industry trade group said Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, dipped 0.2% the week ended Feb. 2 to 630.1.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.23% in the latest week, down 0.06 percentage point from the previous week and the first drop since early January.

Interest rates were slightly below the average of 6.25% in the same week last year.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of U.S. home sales, fell 0.8% to 404.7. The index was below its year-ago level of 425.1, a fall of 4.8%

Mortgage frenzy puts homeowners at risk

WASHINGTON (MarketWatch) -- More than a year after Alan Greenspan warned of the "potential for individual disaster" from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.

On Friday, in a jointly crafted message on so-called exotic mortgages, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.
America's real-estate boom may be over now, but millions of homeowners who thought they were borrowing their way into wealth find themselves instead holding a ticking time bomb, a toxic mortgage with a potential payment far larger than they can afford.....

Exotic mortgages are most popular in the metropolitan areas that saw the biggest price gains from 2003 through 2005. They allowed ordinary families to bid up the prices of ordinary homes to nearly $400,000 in Miami; nearly $500,000 in Bridgeport, Conn.; $600,000 in Orange County, Calif., and more than $700,000 in San Jose and San Francisco.

See full article on mortgages at marketwatch.com

Is This How the Real Estate Boom Ends?

reprinted from abc

These prices are crazy, you think as you scan the local real estate listings. How can anyone afford to buy a house in this market?

That's a question a lot of home buyers are asking themselves these days, and a growing number are coming up with the same answer: Skip the 30-year fixed-rate mortgage and grab a riskier loan with a lower initial payment.

Interest-only, option-payment, 40-year fixed, piggy-back loan, low-doc loan: These weird mortgages come in an assortment of names and flavors, but they all have the same goal -- to help you afford an expensive home. How? More often than not by letting you put off paying down your mortgage.

A few years ago, so-called "nontraditional" mortgages were a mere sliver of the market (less than 3 percent by some estimates); a July survey by the mortgages Federal Reserve found that they now account for more than a quarter of new business at a third of the nation's largest home lenders.

That swift rise has industry observers worried.

"We're very concerned with how safe these products are," says Stu Feldstein, president of financial research firm SMR Research. "There's an awful lot of risk out there."

But who's at risk? Almost everyone. If you're a buyer, the risk is that you'll find yourself with a loan you won't be able to afford in a few years. But even if you're among the 75 percent of borrowers with a stodgy fixed-rate loan or the lucky 35 percent of homeowners with no mortgage at all, this loan lunacy could pose a danger to your home's value.

That's because experts fear that the rash of nontraditional loans has been driving up prices in many markets -- and could intensify the decline if prices soften.

"I think the creative mortgage structures have been the last puff on the real estate balloon," says Nick Buss, vice president of market research at PNC Finance. "Consumers were already stretched, and these products have stretched them just a little bit further."

Piggyback Loans

  A piggyback loan is a combination of a first and second mortgage closed at the same time. Often involving 100 percent financing, the first mortgage loan can cover 80 percent of the cost of the home with a ‘piggyback’ second mortgage valued at the remaining 20 percent.

The most common type, however, is the 80-10-10 in which the second mortgage product accounts for 10 percent of the purchase price and the borrower invests 10 percent as a down payment on the loan.

Although the second mortgage carries a higher rate than the first mortgage and extends for a shorter term, the advantage of the piggyback mortgage is that the interest expense is potentially tax-deductible while the mortgage insurance payment (typically required for loans exceeding 80 percent of the home’s value) is not.

According to a survey by the National Association of Realtors, 25 percent of all homebuyers financed 100 percent of the purchase price of their home. Forty-two percent of first-time homebuyers bought with no money down.

Private Mortgage Insurance Can be Cheaper Than Piggyback Loans

The cost of mortgage insurance (PMI) varies depending on the size of the down payment and the borrower's credit history. PMI can be expensive so the mortgage industry created a way around it:  piggyback loans. With a piggyback loan, the borrower splits the home loan in pices: a primary mortgage for 80 percent, and then a home equity loan or credit line for 20 percent minus the down payment. Structuring a loan this way eliminates the need for mortgage insurance.

A couple of years ago, when you could get a home equity line of credit at 4 percent or 5 percent, piggyback loans were almost always cheaper for the consumer. But now the average line of credit is slightly more than 8 percent, and the average home equity loan is just under 8 percent. And rates on credit lines and equity loans usually run a little higher on piggyback loans.

Bottom line: Piggyback loans have higher monthly payments than they used to have, while mortgage insurance costs the same.  Be sure and ask your lender to work out the details to see which is a better option for you.

Mortgage applications at four-year low

WASHINGTON (MarketWatch) -- Applications for mortgage loans at U.S. banks dropped by 6.7% last week to the lowest level seen on a seasonally adjusted basis since May 2002, the Mortgage Bankers Association said Wednesday.
The number of mortgage applications was down 31% compared with a year ago.
Applications for mortgages to purchase homes fell a seasonally adjusted 6.2%, hitting the lowest level since November 2003. Purchase applications are down 19% in the past year.
The MBA's purchase index is expected to decline another 20% or so, said Ian Shepherdson, chief U.S. economist for High Frequency Economics.
Applications for refinancing loans fell 7.5% on a seasonally adjusted basis. Refinance applications are down about 47% in the past year.
The decline in purchase applications has been much steeper than the recent drop in U.S. home sales. New-home sales have sunk about 6% in the past year, while sales of existing homes are down about 7%. See full story.
The slowdown in home sales "has the potential to translate into a hard landing for the economy because the housing sector has played a major role in the current expansion," said Asha Bangalore, an economist for Northern Trust.

Continue reading "Mortgage applications at four-year low"

What is involved in Refinancing a Mortgage?

When you refinance, you pay off an existing mortgage and take out a new one. An important factor in deciding if you should refinance your mortgage is understanding just what’s involved in the process, the costs and fees you’ll have to pay, and how long it will take you to recover those costs.

When you refinance, you generally will repeat many of the same steps, provide the same information, and encounter the same types of costs that were involved the first time around. The lender’s decision whether to approve your loan application will be determined by an evaluation of: 

• Your financial situation and credit history (since this helps the lender assess your ability and willingness to repay the debt).
• Property value (based on current market value and how much your home is worth).
• The amount of equity in your home (the difference between the fair market value of your home and the amount you still owe on your mortgage).

Reasons for refinancing

To get a lower interest rate mortgage One of the main reasons homeowners refinance their mortgages is to take advantage of lower interest rates. For example, suppose you have a fixed-rate mortgage, but interest rates have declined since you first obtained your loan.  You may find that now you can get a new loan at a lower rate of interest. You can reduce your monthly payments when you refinance a higher rate loan for one with a lower rate. If you plan to remain in your home for several years, the savings you will realize in the form of a lower monthly mortgage payment could justify the costs of refinancing your home. Some lenders may offer a low- or no-cost refinancing (see page 13), in which case your recovery of upfront loan costs may be less of a concern.  How much lower should interest rates be before you consider refinancing? You may have heard a general rule of thumb that your new interest rate should be at least 1 percentage point lower than your current rate for the new loan to result in significant savings.  However, this is just a rule of thumb—you need to consider how long you plan to stay in your home and whether that amount of time will justify your upfront costs in refinancing your mortgage loan. If you’re only a few years away from paying off your current mortgage, it may not make sense to refinance.

You also may wonder when to lock in your interest rate. Usually, you can do so at loan application or approval, or you can float the interest rate until the loan closes. Ask your lender how long he or she will hold a quoted rate for you. You also should ask what happens if rates fluctuate before closing.  If rates have fallen, must you close at your locked-in rate or can you get the lower rate?  What if rates have risen?  Some homeowners think that each time the Federal Reserve lowers the federal funds rate, mortgage rates will decrease as well. This often isn’t the case, because most mortgage rates are not tied to the Federal Reserve’s well-publicized overnight borrowing rates. Fixed-rate mortgage interest rates typically track longer term rates set by the bond markets.  So when deciding when to refinance your home and lock in your new interest rate, be sure you look at the movement of interest rates for the type of mortgage you want, as opposed to just news headlines about Federal Reserve actions.

Build equity faster

Many homeowners want to build the equity in their homes more quickly and choose to refinance a longer term mortgage with a shorter term mortgage. Each month, a certain part of your payment goes to the interest expense on your loan, with the remainder being applied against the principal, or loan balance. With shorter term loans, a greater percentage of your monthly payment goes to the principal. For example, if you currently have a 30-year fixed-rate loan, you might consider refinancing for a 10- , 15- , or 20-year loan, which will lower the total amount of interest you will pay over the life of the loan and speed up the growth of equity in your home. However, remember that as you shorten the term of your loan, your monthly payment likely will increase.

To switch from an adjustable-rate loan to a fixed-rate loan

During those times when interest rates are higher,homeowners often choose adjustable-rate mortgages (ARMs), which traditionally have lower interest rates during their early years than fixed-rate loans. When rates drop, you may want to refinance for a fixed-rate loan, which provides the stability and predictability of knowing exactly what your mortgage payment will be for the life of the loan. Some ARMs have conversion periods that allow you to convert your loan to a fixed-rate mortgage for a one-time conversion fee. If you have an ARM now, be sure to ask your lender about this option.

To get a loan that recognizes your improved creditworthiness

If you had a history of credit problems when you took out your current mortgage, you may find that you can now refinance into a new mortgage that recognizes your improved credit by offering you a more competitive interest rate. People with a history of credit problems often have to pay higher mortgage interest rates. However, credit records change over time. So if your credit has improved since taking out your current mortgage, talk to a lender about refinancing into a loan that recognizes your current improved credit status. Before visiting a lender, you may want to call a credit bureau to get a copy of your credit report and make sure everything is reported correctly.  Ask lenders about Fannie Mae’s Timely Payment RewardsSM mortgage.  It’s a new mortgage designed for people with less than perfect credit that offers a competitive interest rate—plus up to a 1 percentage point drop in your interest rate when you make your mortgage payments on time over a two-year period. If you can qualify, it may prove to be a better deal than your current mortgage.

Draw on the equity already built up in your home

Often referred to as a “cash-out” refinance, you can tap a portion of the equity that has accumulated in your home and receive cash at your loan closing.  Equity is what your home is worth minus the amount you still owe on your mortgage. You can use this equity to pay for expenses such as your children’s education, or home improvements, or to consolidate other debt payments. For example, if your home is now valued at $150,000 and your loan balance is $80,000, you might be able to get a new $135,000 mortgage (cash-out refinances generally are limited to 90 percent of the total value of your home).  That would allow you to repay the existing $80,000 balance and use the $55,000 for other financial needs.

Is there any risk in a cash-out refinance?

Many homeowners like the flexibility that comes with a cash-out refinance. However, the more you tap into the equity in your home, the more your monthly mortgage payments may increase. In some cases, lenders may offer you a loan amount that is 95 percent, 100 percent, or even 110 percent of the value of your home. You may find that you’re being persuaded to use all the equity in your home to borrow money to pay off higher interest credit card bills, or to make home repairs, or even to take that round-the-world dream vacation.  Be sure you carefully evaluate all the terms of the refinance loans being offered to you, especially those that will exceed 90 percent of the value of your home. Such a refinance loan may have a higher monthly payment than your current loan and may carry additional upfront fees.  Be sure to ask the lender about any prepayment penalties, which could cost you thousands of dollars if you decide to pay off your mortgage early. If you decide to opt for a prepayment penalty, you should receive some benefit for doing so—such as a lower interest rate. Make sure you know of any large balloon payments that may come due at the end of a loan period. If not carefully evaluated and understood, these loan features could cost you more than you ever intended to pay.  When thinking about a cash-out refinance, it’s also important to know whether you’re really getting your debt under control or, in fact, taking on more debt. For example, interest rates on consumer loans and credit cards are usually higher than mortgage interest rates. It’s true that you may be able to pay off these higher interest debts by consolidating balances into a mortgage loan requiring monthly payments at a lower interest rate. However,by adding to your total mortgage debt, you’re borrowing additional money against the value of your home. Although debt consolidation through cash-out refinances may be appropriate in some circumstances, you should carefully assess the pros and cons of such a transaction, including tax consequences.  Although many homes increase in value over time, this doesn’t mean home values can’t or won’t decrease. If your property goes down in value, you may not be able to sell it at a profit and get the funds you need to pay back your refinanced loan amount. And if you lose your job and can’t find another, you need to know that you will have sufficient resources available to make the monthly mortgage payments. So don’t take on more of a monthly mortgage payment than you feel comfortable making. You don’t want to do anything that is going to increase the amount of your debt beyond what you are able to repay and risk losing your home.