As of January 10th, the Consumer Financial Protection Bureau has begun implementing new lending guidelines that, according to U-T San Diego’s article on the topic, “federal regulators say will protect against the risky lending practices that powered the housing bubble and caused a huge collapse in home prices that led to the Great Recession” Continue reading
Benefits of 15-year mortgage hard to beat
Why those lured by smaller payments on 30-year loan should reconsider
The case for 15-year fixed-rate mortgages has never been stronger because, in the post-crisis market, the rate advantage over the 30-year has never been larger. The rate advantage is about 0.875 percent, whereas prior to the crisis, it was 0.375 percent to 0.5 percent.
Consider two $100,000 loans, one a 15-year at 3.125 percent and the other a 30-year at 4 percent. The respective payments are $696.61 and 477.42. After 15 years, the borrower with the 15-year loan has paid $39,454 more but is out of debt whereas the borrower with the 30-year loan still owes $64,543.
But there is a counterargument. A disciplined borrower can choose the 30-year loan and invest the difference in payment between the 30- and the 15-year loans, in that way offsetting the higher interest rate on the 30-year loan. Some financial planners recommend this approach to their clients as part of a program to build wealth faster.
The challenge in making such a program work is that the rate of return on the invested cash flow must exceed the rate on the 30-year loan by an amount that depends on how much higher the 30-year rate is than the 15-year rate…
Read the rest of this article by Jack Guttentag at Inman News here: “Benefits of 15-year mortgage hard to beat”.
As interest rates have slid over the past couple of years, Gabriel Bousbib of Englewood, N.J., refinanced his 15-year mortgage not once, but twice-cutting his interest rate in two steps from about 4.6 percent to 3.375 percent.
He’s one of a number of homeowners who refinanced just a year or two ago, but decided it was worth considering again as mortgage rates hit record lows-now averaging around 4 percent for a 30-year loan.
“My monthly savings are going down a few hundred dollars; it adds up over 15 years,” said Bousbib, a financial services executive. “And if rates keep going down, I would refinance again.”
Refinance applications have more than doubled over the past year, though they’re not as high as in previous refinancing booms because it’s harder to qualify in the current atmosphere of tighter credit standards, according to the Mortgage Bankers Association. With the volume of home purchases still low, refinancing accounts for about 80 percent of recent activity.
Although the old guideline used to be that you should consider refinancing only when rates drop at least 2 percentage points, the new wisdom is that it can be worthwhile even with smaller drops.
“For most people, if you can shave three-quarters of a percentage point off your interest rate, it’s worth looking at,” says Greg McBride, an analyst with Bankrate.com, a personal finance website.
For homeowners who plan to stick with the same loan term and want to lower their monthly payments, the math is straightforward. Find out how much it will cost to refinance, figure out how much you’ll save each month and then how long it will take to break even. If you can save enough to offset the refinancing costs within a year or two-or even longer if you expect to stay in the house for a number of years-it’s worth considering.
Though low-interest rates are eye-poppingly low, the refinancing climate has changed from the easy-money days of five years ago. Generally, to get the best rates, homeowners need a 740 FICO credit score, well above the median score of 711. They also usually need at least 10 to 20 percent equity in the property. A recent expansion in the federal Home Affordable Refinance Program should allow refinancing this year by more so-called underwater borrowers – those who owe more than their homes are worth.
Lenders are also demanding much more documentation – including pay stubs, tax returns and bank statements – than they did five years ago, at the insistence of government regulators as well as Fannie Mae and Freddie Mac, which buy mortgages from lenders.
“You have to have a taste for doing paperwork,” says Keith Gumbinger of HSH Associates, a Pompton Plains, N.J., company that tracks mortgage data. “You’re going to be asked for lots of documents. No one loves the process to begin with, and in today’s environment, it’s even less palatable.”
These stricter requirements are simply a return to the kind of underwriting standards that prevailed before lending standards slackened a few years back, leading to the housing bust and foreclosure crisis, McBride says.
“We’re in this mess because money was too easy to get,” he says.
Refinancing costs roughly $3,000, according to several mortgage companies. That covers costs like an appraisal, title insurance, application fees, attorney’s fees and recording the mortgage. Some lenders also offer low- or no-cost options, which they can do by either adding the closing costs to the mortgage amount or charging a slightly higher interest rate.
Bousbib, for example, took a no-cost refinance with Equity Now, a New York-based lender that also lends in New Jersey. “It didn’t cost me a penny,” he says. Equity Now says it charges a slightly higher interest rate on no-cost loans.
Lowering the monthly payment is not the only reason people are refinancing. Many are shifting from a 30-year loan to shorter terms, said Matthew Gratalo of Real Estate Mortgage Network in River Edge, N.J. He has worked with clients in their 40s who hate the thought of carrying a mortgage into retirement.
“They’re looking ahead and saying, ‘I don’t want to pay a mortgage forever; can I get this done in 15 years? Can I be done with this and have it paid off?’ ” Gratalo says.
“Certainly shortening the term makes a lot of sense because you can cut years of mortgage payments,” says Carl Nielsen of Mortgage Master Inc.’s Wayne office.
Nielsen, for example, recently talked to a customer with a $375,000, 30-year mortgage at 4.5 percent. The customer is considering a 20-year mortgage at 3.75 percent. His monthly payments would go from $1,900 to about $2,223, but by shortening the life of the loan, he’ll save more than $150,000 in interest payments.
“That’s kind of a no-brainer,” says Nielsen.
Sources: Greg McBride, Bankrate.com ©2012 The Record (Hackensack, N.J.), Distributed by RISMedia and MCT Information Services.
With signs that sales are on the rise for residential real estate, mortgage rates have again dropped to their lowest point in history this week at 3.88% for a 30-year fixed rate mortgage, while 15-year fixed rate mortgage averaged in at 3.17%.
For more details, read Freddie Mac’s article here: “30-year Fixed-rate Mortgage Averages 3.88 Percent“.
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Now, the final data is in. And it shows that 2011 had the lowest average interest rates in the 41 years that mortgage giant Freddie Mac has been tracking loan rates.
Specifically, the U.S. average was 4.45% on the 30-year fixed-rate mortgage, Freddie Mac reported. That beats the previous low of 4.69% set in 2010.
The past two years are the only ones in Freddie Mac’s records in which the annual average rates were below 5% for a 30-year, fixed-rate loan. In 1981, 30-year mortgage rates averaged nearly 17%. As recently as 2008, rates were averaging above 6%.
Interest rates fell below 4% for the first time in Freddie Mac’s data in October – and stayed at or below 4% for the last nine weeks of the year. Thirty-year rates set six records last year, falling to an all-time low of 3.91% on Dec. 22.
Other types of mortgages were in record territory as well. According to Freddie Mac:
- Fifteen-year, fixed-rate mortgages set eight records in 2011, falling to an all-time low of 3.21% on Dec. 15.
- Five-year, adjustable-rate mortgages set nine records in 2011, falling to an all-time low of 2.85% on Dec. 22.
- One-year, adjustable-rate mortgages set 14 records in 2011, falling to an all-time low of 2.77% on Dec. 22.
The record low mortgage rates failed to spark a revival in the housing market, with fewer buyers able to qualify for a loan or able to afford to purchase a home. Overall, local and U.S. home sales remain well below average levels.
This article is from the Orange County Register; read it here: “2011 had lowest mortgage rates on record.”
Existing-home sales rose again in November and remain above a year ago, according to the National Association of Realtors. Also released today were periodic benchmark revisions with downward adjustments to sales and inventory data since 2007, led by a decline in for-sale-by-owners.
Lawrence Yun, NAR chief economist, said more people are taking advantage of the buyer’s market. “Sales reached the highest mark in 10 months and are 34 percent above the cyclical low point in mid-2010, a genuine sustained sales recovery appears to be developing,” he said. “We’ve seen healthy gains in contract activity, so it looks like more people are realizing the great opportunity that exists in today’s market for buyers with long-term plans.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 3.99 percent in November from 4.07 percent in October; the rate was 4.30 percent in November 2010; records date back to 1971.
NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said housing affordability conditions have set a new record high. “With record low mortgage interest rates and bargain home prices, NAR’s housing affordability index shows that a median-income family can easily afford a median-priced home,” he said.
“With consumer price inflation rising by more than 3 percent this year, consumers are looking to lock-in steady payments by taking out long-term fixed-rate mortgages. However, the problem remains that some financially qualified families who are willing to stay well within their means are being denied the opportunity to buy in today’s market by the overly restrictive mortgage underwriting situation,” Veissi said.
Source: National Association of Realtors