It’s a tough call especially now when interest rates have been in the rise and the spread between fixed rate and adjustable rate mortgages is at an all time high. Even though rates have risen they are still at historical lows. We have all gotten spoiled because they were in the low 4%’s and high 3%’s at one time.
Let’s do some comparing. We will use a purchase price of $200,000 with 20% down which will leave us with a loan amount of $160,000 all paying no points. Keep in mind most rates that you find online are with paying a 1% or more loan origination fee which is 1% of your loan amount so in this example it would be an extra $1600. Make sure you are always comparing apples to apples.
The payment on a 30 year fixed at 5.125% would be $871.18, on a 7 year adjustable at 4.5% it would be $810.70, and on a 5 year adjustable it would be $752.38. That can add up to a lot of money saved if, and it’s a big if, you decide to sell.
I think a 5 year adjustable is a very short period of time and should only be used for a very select few. There is no rule of thumb for everyone. Remember, with adjustable rate mortgages there are caps that prevent the rate from going up past a certain point each adjustment period. Make sure you know what your margin is, the initial rate adjustable cap, and the ceiling on the rate. Always talk to a mortgage expert.
Below is a great article from MarketWatch on this topic too:
http://www.marketwatch.com/story/adjustable-versus-fixed-rate-mortgages-2011-02-16?siteid=rss&rss=1
Many are wondering where interest rates are at now that the mid-term elections are over and the Fed announced their Quantative Easing II (QE2) which entails additional purchases of bonds. Well, rates are still at historic lows and it has certainly created a lot of volatility.
The day the Fed met mortgage bonds which move interest rates got worse because the amount of bond purchases per month was at $75 million per month versus the expectations of $100 million per month. The following day the bond markets rallied and then we had the Friday unemployment report which was better than expecations and bonds got worse.
In English, interest rates are still the same prior to the announcement of the Fed’s bond purchase program. When mortgage bonds get about 25 basis points (.25) worse banks will look to reprice interest rates for the worse. Just because they do a reprice for the worse doesn’t necessarily result in a higher interest rate. It may just be less pay for the mortgage professional.
The same can be said for when bonds get 25 basis points better, it may not result in a better interest rate. Lots of times it will take a 50 basis point movement but there is no exact science to figuring this out. The bigger problem is when bonds improve and you think rates will improve and they don’t. The reason is banks may not pass the savings on because they get overloaded with volume. How do you reduce your volume to you can still provide a service, make rates higher so you don’t get new loans for a day or so.
The bottom line is that you should lock your interest rate in when you are happy with your payment and never looks back. It’s better to be locked wishing you were floating then to be floating wishing you were locked.
I think Ed Conarchy of Cherry Creek Mortgage said it best, “it’s better to be locked in and wishing you were floating then to be floating wishing you were locked.” Interest rates are at historic lows and lower than I ever thought they would go. If you have been thinking about refinancing your mortgage now is the time.
It is a great time right now to lock in a rate. Even if the Federal Reserve announces at their next November 3rd meeting that they are going to buy more mortgage-backed securities and rates do drop you can try to renegotiate your interest rate. You won’t get the current market interest rates but if they drop low enough you will get close to it and you took out the risk by locking in earlier and putting a ceiling on your interest rate. To find out more on how the renegotiation policies work you will have to speak with your Mortgage Professional because every bank is different and every loan is different.
I don’t know about you but I don’t make financial decisions based on what our government might do. Part of their “Quantitative Easing 2″ (QE2) which is to buy more bonds is already partly built into these incredibly low interest rates so if they do announce they are doing this and it’s not as big as some had thought rates could rise. You just never know.
Anyway, don’t be greedy and miss out on these low rates. Rates can go lower but they can also go higher. If they go lower and you already refinanced you can refinance again but if they go higher and you didn’t refinance you just missed out. No one can predict the future. All we know is at the present time rates are extremely low.
The saying goes “if it’s too good to be true it probably is.” A no closing cost mortgage is no different, you pay one way or the other.
The way a no closing cost loan works is you end up getting a higher rate so that the closing costs can be paid through the premium with a higher interest rate. An example is if market rates are at 4.25% paying no points a no closing cost mortgage might be at 4.75%. You have to determine what is best for you depending on what your plans are for the future.
If you need the no closing cost option because you are short on the monies needing to close than you might want to rethink purchasing a home. There are more costs that come with owning a home than renting.
It can be a tough call in this current market to decide because part of me says that rates are at historic lows so you want to lock in the lowest possible rate since you need to go into it knowing you need to hold onto the property for 10 years. The other side of it is just when we think interest rates can’t go lower they do and if you did a no closing cost loan to begin with you would be able to refinance to a lower rate either paying closing cost only once or doing another no closing cost loan hoping they fall again.
There are talks that the Fed will announce on November 3rd their plan to buy more mortgage-backed securities which in turn would make rates move lower temporarily. I don’t think betting on anything the government is going to do is a smart decision. I am not critizing our government or any specific party here it’s just I don’t recommend making your investment decisions based entirely on what they may or may not do.
The safe bet is probably to pay the closing costs but each and every loan is different depending on their future and goals. Always consult a Mortgage Professional first before deciding.
That was the headline in The Wall Street Journal and I have included the link below. There has never been a more important time to deal with a mortgage expert. As I have said a hundred times lately, there is much more to a mortgage than an interest rate.
You truly get what you pay for in life and I think many people are slowly starting to realize that. If someone offers an interest rate much lower than everyone else it either doesn’t exist or you are going to receive very poor service and advice.
I am not kidding when I say that I get numerous calls a week about deals that did not close and they found out at the last minute. The other day a client called and said he needed to refinance his property to get his name off of the loan so he can buy another home. I mentioned doing an assumption and he said he is working on that right now. However, prior to that he tried refinancing his FHA mortgage but the appraisal came in too low. I asked why he didn’t do an FHA Streamline Refinance Without an appraisal and he said his mortgage person never mentioned that. Now, that low appraisal is tied to the property and his only hope is that his current mortgage servicer will do the assumption.
There is no set formula for determining when it benefits you to refinance. It all depends on how long you plan on keeping the loan, how far in you are with your current loan, the costs and savings involved, etc. This is especially true with FHA refinances since they can be more costly with the Upfront Mortgage Insurance Premium. You need a Mortgage Professional to help guide you.
http://online.wsj.com/article/SB20001424052748704652104575494190518195172.html
Just as with most questions regarding mortgages the answer would be it depends. There are no set rules with this or anything else pertaining to financing. Every borrower’s situation is different and that is why it is important to deal with someone who is going to guide in you the right direction, a Mortgage Consultant if you will.
My personal opinion right now for most would be to get a 30 year fixed rate mortgage. I say this because interest rates are so low. Yes, they are lower on adjustable rate mortgages but I feel this economy is too unpredictable that who knows if you will truly pay it off before the rate adjusts. Another point to add to that is why would you want to pay off a mortgage that you are financing in the 4 percents? Make sure to max out your retirement first, payoff high interest rate credit cards, have a rainy day fund, etc.
I have a client right now who is trying to decide between a 15 year fixed and a 30 year fixed. Interest rates are about .5% lower on 15 year fixed rates but if you take out a 30 year fixed rate you can amortize it over 15 years and make a 30 year payment should you need to. If you take out a 15 year fixed you have to make that payment whether you want to or not. I had a client who refinanced into a 15 year fixed rate 2 years ago, called me a year ago to refinance into a 30 year because he was worried about his job, and just as we started the refinance process he lost his job. Now he is stuck with a 15 year fixed payment without a job. It is sad and scary.
This is just another reason as to why everything isn’t all about interest rates. I don’t mean to beat a deadhorse but you can’t what you pay for in life and if you are getting financing from the cheapest person that is probably the type of advice you are going to get.
This is an easy question, an experienced and honest one. The hard part is how do you determine who that is when everyone is a sales person. You probably won’t know until it closes or down the road but hopefully with the new National Mortgage Licensing System (NMLS) that is going into effect will help.
The NMLS requires all Mortgage Loan Originators (MLOs) to pass a state and national exam, do a criminal background check, and have a credit report pulled. As long as everything checks out each MLO will get their own unique identifier number that you will be able to look up.
Too many borrowers get caught up in the interest rate. Although you don’t want to get a rate that is .5% above everyone else you do want to make sure that they are advising you and putting you in the right mortgage product, an 1/8th to a ¼ of a point in interest rate won’t change your life but a transaction gone bad will.
What do I mean by that? I mean that someone should be asking you about how long you plan on staying in the home, look at your credit card debt, see if you want to max out your retirement, etc. If the answers are yes to looking to pay down credit card debt and maxing out your retirement you shouldn’t be going into a 15 year fixed most likely. If you want to make bi-weekly payments you probably want to be told that it may not be a good idea to set it up with your lender and instead just add an extra amount of principle each month so that after 12 months you will have made 13 payments. You don’t want to have a higher set payment and one month need extra money because of an unexpected expense.
I could go on for days on this topic but the most important thing to remember is that there is a lot more to a mortgage than just an interest rate. There are a lot of great banks and lenders out there but they are only as good as they people they employ and who is handling your loan.
I have been getting a good amount of calls from people who are buying or just bought a home with cash and now want to refinance. The first step is to ask the question prior to buying but if you didn’t I still can help you.
Fannie Mae and Freddie Mac who if you want the rates you see advertised are the guidelines you want your bank to be underwriting your loan to. The problem is that they require you to own the property for 6 months before you can refinance your loan. If you have owned the property between 6 to 12 months your refinance will be based off of the lesser of your purchase price or appraised value. After 12 months they will go off of the appraised value.
The only way you will be able to refinance within the first 6 months is if your bank or lender is going to put the loan in their portfolio. What that means is they hold onto the loan and it’s not being sold to Fannie Mae or Freddie Mac. I happen to have an investor that will do that. The interest rates are about 1% higher but if I were able to lock in a rate today at say 5.875% versus normal rates of say 4.875%, I would do it. I wouldn’t want to risk where rates will be in 6 months. That isn’t to say I am right or I would win that bet but it’s I just don’t like to gamble.
I am not a CPA and make sure to always consult one but I wanted to share this with you because it is new to me.
People who cashed out refinances, or had part of their mortgage debt forgiven when they sold their homes through short sales, will probably owe the IRS a big payback.
In 2007, Congress passed the Mortgage Forgiveness Debt Act, but that doesn’t let everyone off the hook.
Here are exceptions to the rule:
• Anyone who did a cash-out refinance and spent the money on something not housing related, then got in trouble and lost their home to a foreclosure or short sale, will owe the IRS as if the money from the refinance were earned income.
• The IRS will forgive tax liability only on money from home-equity loans that was spent to improve the property.
• Anyone who lost a vacation home or investment property to foreclosure or short sale will owe Uncle Sam.
• Multi-million dollar homes — lost or sold — are always subject to tax.
http://www.realtor.org/RMODaily.nsf/pages/News2010040904?OpenDocument&WT.cg_n=RMO&WT.cg_s=RSSDaily
I have been saying for quite some time that now is the time to refinance because interest rates are at historical lows and they really have nowhere to go but up. I don’t think you are going to see interest rates skyrocket overnight but I also don’t know how long they will stay this low. So my opinion is that you lock in your rate now.
The article below talks about what you should do if you have a low interest rate adjustable. Just as the article suggests, if you are planning on moving soon you should probably stay put. I would agree with that however in an unpredictable economy can you guarantee that you will be moving or that you will be able to sell your home? We all hope things are better in the next 24 months but no one can know for sure.
Meredith Whitney, a top financial analyst, is calling for a double dip recession in housing. She has done pretty well on her picks with the housing market. Some are even calling for a 30% drop in Florida. I think you should be prepared for another 10% drop but who am I.
The bottom line is to take advantage of these low rates if you can and don’t be greedy.
http://online.wsj.com/article/SB20001424052702304830104575172032313214888.html?mod=djemITP_h
