Types of Mortgages

There are two common choices of mortgages available for refinancing, together with a third concept. Choosing the appropriate type of mortgage for the homeowner’s circumstances is the largest decision that homeowners confront.

The first common option is the fixed rate mortgage. The interest rate remains permanent throughout the duration of the loan. This is beneficial for homeowners who are able to negotiate a low interest rate.

The second common option is an adjustable rate mortgage. The interest rate will fluctuate through the term of the loan. The fluctuations are dependent on indexes, such as the prime. The rate will rise and fall in accordance with the index’s increases and decreases. This type of mortgage is not as secure as a fixed rate mortgage. Homeowners with questionable credit rates are often offered this product.

There is a limited protection built into adjustable rate mortgages. A clause incorporated into the loan may limit how many percentage points the rate of interest is permitted to increase during a specified amount of time. This protects the homeowner from significantly higher mortgage payments due to marked interest rates hikes.

The third concept is the hybrid mortgage. This mortgage has combined elements of the fixed rate mortgage and adjustable rate mortgage. The first specified portion of the mortgage would come with a fixed interest rate, with the remainder of mortgage having an adjustable interest rate. Hybrid mortgages usually have a lower fixed interest rate than the standard fixed rate mortgage. Lenders have introduced this concept to solicit customers.

Closing Costs

Homeowners need to calculate the closing costs attached to a mortgage before making a commitment to refinancing. Closing costs can add up to a substantial amount. Typical closing costs including application, appraisal and loan origination fees, together with other miscellaneous charges. These costs need to be compared to the savings the homeowner expects to receive from refinancing.

Overall Savings

Overall savings are an aspect the homeowner needs to thoroughly calculate. If there are no overall savings, refinancing may not be advantageous. The goal of most homeowners in refinancing is to realize some savings at the end of the day. There are some homeowners, however, who are concerned with lowering their monthly payments. If their primary consideration is not focused on overall savings, then refinancing may be advisable.

Overall savings are dependent on a number of factors. The interest rate of the old mortgage is compared with the rate of the new mortgage. Also, the amount of the existing mortgage is relevant. How long the homeowner plans to own the home has an effect.

It should not be assumed that the money saved by reducing a previous interest rate to a more favorable one is the sum total of savings. Closing costs must be deducted from the interest savings. If the result of this subtraction is negative, refinancing may not be worthwhile. Alternatively, if the end result is positive, the homeowner will have a net overall savings.

This information should assist the homeowner in deciding if refinancing is a viable option.

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The 15-year fixed rate mortgage averaged 4.36 percent with an average 0.6 point, this week, down from last week when it averaged 4.46 percent. A year ago at this time, the 15-year fixed rate mortgage averaged 5.78 percent. This is the lowest the 15-year fixed rate mortgage has been since Freddie Mac started tracking it in 1991.

Adjustable Rate Mortgages are also at an all time low, averaging 4.42 percent this week, with an average 0.6 point, down from last week when it averaged 4.51 percent. A year ago, the 5-year adjustable rate mortgage averaged 6.00 percent.

The all time low for the Freddie Mac survey, began in 1971, and was recorded in April.  It showed a 30-year fixed rate for a solid borrower at 4.78 percent with 0.7 percent in lenders fees.  Last year at this time, 30-year fixed loans were at an average of more than 6 percent.  Even 15-year fixed loans were at 5.78 percent.  Freddie Mac released in a survey on October 1, that  15-year fixed loans are averaging 4.36 percent and 0.6 percent in points, an all time low. 

Frank Nothaft, Chief economist for Freddie Mac noted that although existing home sales fell in August, it was still one of the strongest showings in 23 months.  “Low mortgage rates are helping stabilize home sales,” says Nothaft.  In July, house prices increased for the second month in a row, after adjusting for seasonality.  Increases were more broad-based in July with the prices of houses rising in 17 of the metropolitan areas, compared to 16 of the areas in June.  In August, new home sales skyrocketed to the highest pace since September 2008.  The inventory of unsold houses fell to the lowest level since February 1983.

You are probably asking why the rates are so low.  You can thank the Federal Reserve for that.  The Federal Reserve is planning on buying $1.2 trillion in mortgage bonds, given out by Freddie Mac and other government-controlled entities. 

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Refinancing means getting a new mortgage and using some or all of the proceeds to pay off the old mortgage. The opportunity to pay a lower monthly mortgage payment is usually the most attractive aspect of refinancing. Homeowners with an adjustable rate mortgage that fluctuates may seek a fixed rate mortgage. You can also decide to refinance to consolidate first and second mortgages. Refinancing can shorten the life of your loan. The monthly payments on a 15 year loan are considerably higher than on a 30 year loan with the advantage that the length of your payment responsibility is cut in half.

Because you usually refinance when mortgage rates are lower than those you currently are paying, you end up saving money. The logic follows that if you are paying less interest in your monthly mortgage payment, you will have more money to pay against the principle. This means you can potentially pay your mortgage off faster. In some cases, a lower monthly payment means that you will have less trouble carrying the mortgage and are less likely to default.

There is a load of fees to be considered in the refinancing process. Before you sign any documents,be sure to explore all of your options and understand all the fees that may be required. While you may save money on the interest rates, your budget may not have room for all the refinancing fees!

Your costs for refinancing will likely be some or all of these: a licensed appraisal fee; attorneys’

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Mortgage rates will likely dip even lower in 2009, bringing up the question of whether it’s better to borrow now or wait for an even better rate. Mortgage experts tend to disagree on this issue. In simple terms: if you like to gamble, then wait. If you lose sleep at night fretting that rates will soon rise, then borrow now.

Here are some things to consider about the current mortgage market:

Comparison Shop, Especially Now

In a typical economy, one loan is pretty much the same as any other, since most interest rates on 30-year fixed loans are grouped within about a quarter of a percentage point. This is not so today. With the uncertain economy, lenders vary greatly in terms of how much risk they’re willing to assume in loaning money. This is why it’s important to shop around. You’ll want to keep checking often, since home loan rates are continually in flux.

Lock in a Fixed Rate for New Loans

Disregard what you might have heard in less troubled times about the pros and cons of fixed versus adjustable rate mortgages. Nowadays, you’ll always get the best deal on a fixed rate loan, because this is the financial market that congress has designated for support. The time of securitized adjustable-rate mortgages has come to an end, so most banks don’t want to originate ARMs. Lenders no longer offer attractive rates on these risky loans.

Keep Your ARM, for Now

If you already have an ARM that is due for an interest rate adjustment soon, there’s no need to rush to get rid of it. Short term interest rates have taken such a dive that you’re likely to actually see a reduction in your monthly payment. The one-year Treasury bill yield has dropped to less than half a percent; so even if your ARM is indexed to the one-year Treasury bill, chances are you’d still only pay about 3.25% per year. ARMs that are indexed to LIBOR are adjusting to the low 4% range, which is also an excellent rate.

Monitor Your Finances

Getting one of those attractive low interest rate fixed loans is difficult, because Fannie Mae and Freddie Mac have made standards even stricter for loans they’re willing to buy or guarantee, even though both of these megalithic mortgage finance companies are now under government control

Your FICO score should be at least 720 to garner the best possible interest rate, though for a large enough fee, both Fannie and Freddie will guarantee loans all the way down to FICO scores in the mid 600s. You may also need a 20% down payment.

One of the biggest hurdles for many buyers has been the tightening of lenders’ debt-to-income standards. Monthly mortgage payments can’t be more than 28% of gross income for Fannie or Freddie conforming loans, and all monthly debt payments combined (e.g., student loans, auto loans, revolving credit accounts, etc.) can’t exceed 36% of a borrower’s gross income.

For a loan guaranteed by the Federal Housing Administration (FHA), these figures are 29% for mortgage debt, and 41% for combined monthly debt.

Carefully Consider Whether to Refinance Now

Deciding when to refinance boils to down to how willing you are to accept a certain amount of risk. Utilizing one of the many available online calculators can help you make a good analysis. A good rule of thumb is that refinancing is a good option if the new interest rate is a full percentage point below what you are currently paying, and if you don’t plan on moving soon.

The argument for waiting to refinance is that the Federal Reserve and Treasury Department are set on pushing mortgage rates even lower in 2009, and are likely to get their way. This means putting pressure on banks to keep lowering interest rates; not just on mortgage loans, but on all kinds of personal loans as well.

On the other hand, while it seems like a reasonable predication that rates will drop even lower, nothing is guaranteed. Rates have crashed so quickly that trying to wait for rock bottom may be a mistake. If the numbers work for you, you really can’t go wrong in deciding to refinance now.

Refinance-A-Home Mortgage.com offers complete mortgage information and practical tips to help you get your desired mortgage. If you need timely mortgage information or a quick and easy mortgage quote comparison you’ve come to the right place.