Tag Archives: Mortgage Rates

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Three ways to qualify for the cheapest mortgage possible By Terence Loose

https://homes.yahoo.com/news/Things-to-qualify-for-cheapest-mortgage-173655653.html

Do you want to buy a home now or in the future, but fear that it’s too expensive? Well, there may be ways to make it more affordable.

And while you may not be able to do much more than haggle over the asking price of your dream home, there are things you can do to make your mortgage cheaper.

“It’s all about showing the lender that you are financially solvent and a low risk to loan a large amount of money,” says Ellen Davis, a senior mortgage banker with Corridor Mortgage Group in Columbia, MD. In short, your lender wants to feel confident that you’ll pay them back.

So, keep reading for three things you’ll need to get the best deal on your mortgage.

1. A High Credit Score

You may feel that you are more than just a number, but according to Davis, your credit score is one of the first things a potential lender checks when going over your loan application. Most lenders use the FICO credit score, she says which ranges from a low of 300 to a high of 850.

To qualify for a mortgage at all you’ll probably need a credit score of at least 620, maybe even 640, says Ken Lin, CEO of CreditKarma.com, a site where consumers can access their free credit reports.

But to qualify for those great rates that are splashed all over lenders’ ads, in addition to other requirements, you’ll probably need a score somewhere above 720 and possibly as high as 740, says Davis.

In other words, the higher your score is the lower your interest rate and the cheaper your mortgage.

And the difference between a poor and strong credit score and your resulting interest rate could mean a lot over the course of your mortgage. In fact, according to an example provided by Credit.com, a website that educates people about credit, it could be enough to pay for your kid’s education or a nice new car.

Their example looked at the difference between interest rates offered to borrowers in three different credit ranges for a 30-year, fixed-rate mortgage of $200,000 in May 2014. Here’s what they found:

Credit Score Interest Rate Monthly Payment
(Principal & Interest)
Lifetime Cost Total Savings with Great Credit
740 and above 4.025% $958 $344,778
680-699 4.974% $1,070 $385,368 $40,591
620-639 5.481% $1,133 $407,950 $63,173

As you can see, having good or excellent credit could save you tens of thousands of dollars over the life of your mortgage.

To attain that great credit score, Lin says you’ll want a few things. One is to have a few credit cards.

“You are not born with good credit – you have to earn it,” says Lin. People sometimes believe that because they don’t have any debt or have never used credit that they must have great credit. Not true, says Lin. “You have to use credit to get good credit,” he says.

Next, in addition to never being late on your payments, keep your outstanding balance to 30 percent or less of your available credit limit, he says. So, if you have two credit cards with an available credit limit of $5,000 each, keep the outstanding balance on each below $1,500.

Finally, check your credit and correct any mistakes. Lin says 25 percent of all credit reports have a meaningful error on them, which could range from inaccurate late payment records to identity theft.

Lin also suggests checking your score at least six months before you apply for a mortgage, so you have time to work on improving it by doing a few of the things listed above.

He says that while a few late payments or a delinquency can lower your credit score fast, it takes time to raise your score more than a few points. He adds that six months before applying for a mortgage is not the time to close cards or get new ones – both can lower your score.

2. A Big Down Payment

A big down payment may sound like the opposite of “saving money,” but putting a lot of money down on your home could save you a bunch in interest and reduce your monthly costs.

First, it’s merely a math equation to see that a bigger down payment – and therefore, borrowing less – saves money. That’s because you will pay 30 years of interest on every dollar you borrow.

A larger down payment also helps with the interest rate you’ll be offered, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc. Just like with credit scores, the percentage you put down could affect the amount of risk the lender sees in you, he says.

The numbers are not as straightforward as with FICO scores, but a good rule of thumb for most loans is to shoot for 20 percent down. If your other factors hold up – good credit report and score, good income, etc. – Duffy says this is the magic number to get the best rates.

That’s because your down payment is the lender’s “cushion” against you defaulting on your mortgage, says Duffy.

Finally, putting 20 percent down gets you out of having to pay private mortgage insurance (PMI), for exactly the same reasons as outlined above: under 20 percent down and lenders begin to get nervous about you defaulting on your mortgage.

Calculating PMI is complicated and varies widely based on the amount you borrow, the amount you put down, as well as other factors, says Duffy, but it can really add up. In fact, it can range from .5 percent to 1 percent of the amount of the mortgage per year, he says.

Run those numbers for a $300,000 mortgage, and PMI could ding you for $1,500 to $3,000 a year, or $125 to $250 per month.

To see how much all this could cost, let’s look at a simple example of two 30-year mortgages. We’ll keep the sales price of the home ($300,000) and the interest rate the same (4.20 percent*), but change the amount of down payment.

Mortgage A Mortgage B
Down Payment Percentage: 20 10
Down Payment Amount: $60,000 $30,000
Total PMI (@.75 percent/year):* $0 $11,981 ($168.75 for 71 months)
Monthly Mortgage Payment: $1,174 $1,320
Total Cost of Interest and PMI: $182,511 $217,306
Total Cost of Home: $482,511 $517,306

Bottom Line: As this example clearly shows, that 10 percent extra in down payment pays off overtime to the tune of savings of nearly $35,000.

3. A Low Debt-to-Income Ratio

The amount of debt you have compared to the amount of income you have is another key area of interest for any lender. Remember, the thinner you are stretched financially, the more risky you are perceived to be by lenders.

One way lenders assess this is by calculating your debt-to-income ratio (DTI), which is simply the percentage of your gross monthly income that goes toward paying your debt.

“Any monthly payments on credit cards, student loans, car loans, personal loans, etcetera, is used in the underwriting process to help calculate the debt-to-income ratio,” says Davis. In addition, the mortgage payments, taxes, and PMI on the home you are trying to buy will also factor in.

When all that is calculated, you’ll want your DTI to be 40 to 43 percent or lower to qualify for a mortgage, depending on the institution, says Davis.

However, for the best rates, you’ll want your DTI to be in the mid 30s or below, all else being equal, says Duffy.

So, say your total debt obligations for credit cards, car and personal loans, and the mortgage for which you’re applying came to $1,500 a month. Your gross monthly income would have to be at least $4,286 to be considered for the best rates. That would be a DTI of 35 percent. Again, it’s not exact, but it’s a good start.

*According to Freddie Mac, one of the nation’s largest mortgage holders, for the week of September 25, 2014. In the PMI example, this figure is based on the fact that with most mortgages, you can stop paying PMI once you reach 20 percent equity in your home. Make all scheduled payments in the above example, and that happens after 71 payments.

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Borrowers with adjustable rate mortgages could lose big – By Terence Loose

https://homes.yahoo.com/news/ARMs-lose-money-223146070.html

As you probably know, adjustable rate mortgages have lured aspiring homeowners with their attractively low interest rates. How low? Well, for the initial period of often five to seven years, they usually fall below the interest rate of a 30-year, fixed-rate mortgage. As a result, you would likely have a low monthly payment.

However, after that honeymoon period, ARMs adjust according to a predetermined index. In short, if interest rates go down, so does the rate on your ARM. But if they go up, your interest rate – and typically your monthly payment – rises, too, which is cause for concern.

Of course, ARMs do make sense for a lot of people. So read on for information that will help you decide whether to hold onto your ARM or look for new money-saving opportunities.

Interest Rates Will Likely Go Up

Since the interest rates on ARMs adjust after a set period of time, knowing where interest rates are headed would be helpful. But how can you tell where rates are going?

Well, in July 2014, the Federal Reserve confirmed that it would end what’s known as quantitative easing (QE4) in October. This decision will most likely increase interest rates. Here’s the simple version of why:

Beginning in January of 2013, in the QE4 program the Federal Reserve bought $85 billion worth of U.S. Treasury notes from U.S. banks every month, tapering off that amount beginning late last year. By buying these notes, QE4 increased the money that banks had to lend, increasing their competition for borrowers and therefore lowering interest rates.

Hence, when QE4 ends, rates will rise, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc.

“There’s absolutely no doubt that rates will rise once [the Fed] ends the stimulus. Rates only have one way to go when the Fed stops buying altogether, and that’s up,” Duffy says.

So how high will rates go? The Mortgage Bankers Association (MBA) projects rates reaching 5 percent for 30-year fixed rate mortgages by the second quarter of 2015. For comparison, as of September 11, 2014, the average interest rate for a 30-year, fixed-rate mortgage stood at 4.12 percent, according to Freddie Mac, one of the nation’s largest mortgage lenders.

But even a small jump in rates can have a huge affect on your ARM – and your wallet. Now, every situation is unique, but consider that a typical adjustment rate cap (the most your rate can adjust every adjusting period, usually each year) is 2 percent, according to HSH.com, the nation’s largest publisher of mortgage and consumer loan information.

We’ll assume that rates won’t rocket up by 2 percent a year and use half of a percent instead, along with a lifetime cap of 12 percent. This example shows how the monthly payment changes over the life of a $200,000 5/1 ARM that adjusts annually after year five, starting at a 3 percent interest rate.

Year       Interest Rate                     Monthly Payment

1 – 5        3 percent                             $843

6              3.5 percent                         $890

10           6 percent                             $1,119

15           8.5 percent                         $1,327

20           11 percent                          $1,499

22           12 percent                          $1,553

Again, every situation is unique, so if you have an ARM, you should check the terms of your contract, but as you can see, things can get expensive fast.

Fixed Rates are Still Historically Low

The big attraction of ARMs, of course, is the very low initial interest rate. But that can blind many to the fact that even after the past year or so of rising rates, 30-year fixed-rate mortgage rates are still extremely low, historically speaking, says Ellen Davis, a senior mortgage banker for Corridor Mortgage Group in Columbia, Maryland.

She says that while every case is unique, this is a very good reason to lock in a rate for 30 years by refinancing an ARM. It provides peace of mind that if rates do go up higher and faster than expected, you’re still okay, Davis explains.

“Right now fixed rate loans are amazingly low, so refinancing might make [homeowners’] current payment a bit higher [than an ARM] but give them the security of knowing that the mortgage payment will not change,” she says.

And history does show that anything can happen. If you need proof, check out the average 30-year fixed-rate mortgage interest rate for July 1 of every decade from 1974 till now, according to the Federal Reserve’s historic data.:

July 1, 1974: 9.28 percent

July 1, 1984: 14.67 percent

July 1, 1994: 8.61 percent

July 1, 2004: 6.06 percent

July 1, 2014: 4.13 percent

How does that 30-year, fixed-rate mortgage look now? We thought so. And that’s without even showing you the 17.6 percent interest rate from 1982.

Fixed Rates Insulate You Against Inflation

A certain amount of inflation can be a good thing, which is why the Fed made one of its goals to stimulate it. For instance, slight inflation increases the value of things like your house. Of course, inflation also means the price of everything in your house, from the beer in the fridge to the couch you enjoy it on, also goes up.

But when you buy or refinance your home with a 30-year fixed-rate mortgage, you are essentially hedging against inflation, says Ian Aronovich, co-founder and CEO of GovernmentAuctions.org, a company that gives home buying and mortgage advice.

“As money loses it purchasing power, as has been the case for a while, it makes sense to take out a 30-year mortgage since you will be repaying it with dollars that are in all likelihood going to be worth less than they are when you bought the home,” he says.

Duffy says this helps offset other home and life expenses, too. If inflation does take hold, then as other things around the household eat up more and more income, it’s going to be very helpful to have a fixed rate and a fixed payment for housing, he says. As a result, people can control expenses, still put money away, and save for retirement.

“So you’re insulating your mortgage payment from inflation,” he says.

With an ARM, that insulation is not guaranteed, since your interest rate can rise along with everything else, notes Duffy.

ARMs Do Make Sense for Some

There’s a reason ARMs exist: They are a good product for some. In fact, our experts have identified three common situations in which an ARM might make a lot of sense.

The first is if you believe interest rates will go down in the future. Then, your rate will adjust down, not up. But we’ve already outlined why that’s unlikely.

The second situation when an ARM makes sense, says Davis, is if you plan to sell your home before the initial fixed-rate period of your ARM expires, or even soon after.

“Not all ARM holders should refinance. If their current ARM payment is low and they know that they will be moving within a certain period of time, that is a big part of the decision making,” she says.

The third scenario where an ARM may make sense is if you plan to refinance a home after you do some improvements, says mortgage broker Gloria Shulman, founder of Centek Capital in Beverly Hills. In that case, an ARM’s extremely low initial interest rate could save you a lot of cash, which you can use to fix up the home.

“For example, if you are buying a house you plan to renovate, it makes sense to apply for an ARM that can be refinanced when the house is worth exponentially more after you finish the work,” she says.

 

Why Do Mortgage Interest Rates Change? Part II

If the demand for credit reduces, then so do interest rates. This is because there are more people who are ready to lend, sellers, than people who want to borrow, buyers. This means that borrowers, buyers, can command a lower price, i.e. lower interest rates.

When the economy is expanding there is a higher demand for credit so interest rates go up. When the economy is slowing the demand for credit decreases and thus interest rates go down.

 This leads to a fundamental concept:

Bad news (i.e. a slowing economy) is good news for borrowers as it means lower interest rates.
Good news (i.e. a growing economy) is bad news for borrowers as it means higher interest rates.


Another major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly the Federal Reserve increases interest rates to slow the economy down and reduce inflation.

Inflation results from prices of goods and services increasing. When the economy is strong there is more demand for goods and services, so the sellers and producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Also lenders naturally want to see a positive return on their money as their reward for lending it. This leads to the concept of the “real” rate of return. This is typically 3% per year. If inflation is 4 % per year, lenders will want to earn 7% per year on their money.

Likewise, if prices are rising rapidly, people are inclined to borrow “today’s” money so as to repay it with “tomorrow’s” money, which will be worth less.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages.

 There is usually an almost fixed spread between A credit mortgage rates and treasury rates. This is not always the case. For example, bank failures in the Far East in the late 90s caused mortgage rates to move up while treasury rates moved down as fearful investors fled to the safety of the treasury bonds and notes.

Bonds Rates

There is an inverse relationship between bond prices and bond rates. This can be confusing. When interest rates move up, bond prices move down and vice versa. This is because bonds usually have a fixed price at maturity––typically $1000. The bond will start off being sold for the face value, $1000 and at a set interest rate. If interest rates go down, then this bond will go up in price so that these bonds will remain fairly priced compared with current bond offerings. Obviously the longer before the bond matures for the face value, $1000, the greater the price premium will be to enjoy that higher than current yield for the rest of the bond’s term.

The inverse also applies. If interest rates move up, the bond seller will have to reduce his price to offer a similar yield to current bond offerings.

Questions? Contact us at info@mortgagelinkhome.com or visit our web site at www.mortgagelinkhome.com

Why Do Mortgage Interest Rates Change? Part I

To understand why mortgage rates change we need to know why do interest rates change and there is not one interest rate, but many interest rates!

Prime rate: The rate offered to a bank’s best customers.
Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
Treasury Bonds: Long debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
Federal Funds Rate: Rates banks charge each other for overnight loans.
Federal Discount Rate: Rate New York Fed charges to member banks.
Libor: : London Interbank Offered Rates. Average London Eurodollar rates.
6-month CD rate: The average rate that you get when you invest in a 6-month CD.
11th District Cost of Funds: Rate determined by averaging a composite of other rates.
Fannie Mae Backed Security rates: Fannie Mae, a quasi-government agency, pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Security rates: Ginnie Mae, a quasi-government agency, pools large quantities of mortgages, securitizes them and sells them as Ginnie Mae-backed securities. The rates on these securities affect mortgage rates on FHA and VA loans.

Interest-rates move because of the laws of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more people who want money, buyers, so people who are willing to lend it, sellers, can command a better price, i.e. higher interest rates. If you have questions about your mortgage please contact me or visit my web site at www.mortgagelinkhome.com.