Refinance rates

Home mortgage foreclosure rates have reached historically high levels. The number of delinquencies has risen for eight quarters straight, with over 2 million homeowners filing for foreclosure in the past year. Many are predicting that those filings could more than triple in the years to come. Relaxed lending practices and over confidence that home values would continue to increase at the tremendous rate it had been during the real estate bubble had many consumers taking on a risky home mortgage. During this time, the subprime home mortgage market flourished, as more and more lenders offered loans to consumers who did not qualify for regular prime loans. In some cases, borrowers were given loans that required no money down, often without having to verify their income. In other cases, a consumer took on an adjustable rate home mortgage anticipating that the home value would increase or they would get a raise before the rates changed. There was so much optimism about the housing market that banks were selling more and more home mortgage loans on the secondary mortgage market to be packaged and sold as mortgage backed securities. Homeowners, lending institutions, banks and those invested in the various home mortgage derived products were left reeling from their losses when the housing market dropped and the credit sector hit troubled times.

Only a month into his new office, President Obama has made it clear that any plan to help stimulate the economy will include help to boost the ailing real estate sector. And any stimulus plan will certainly try to stem the rate of home mortgage deliquencies. As the country anxiously awaits the specifics of the stimulus package, things such as incentives for banks to lower home mortgage bills are being discussed. President Obama said he aims to help those struggling before they reach foreclosure. It will be difficult task to determine who will qualify for assistance and who will not. If he meets the criteria, a borrower may get a lower interest rate on his home mortgage or defer the principal to the end of the term of the loan. A home mortgage foreclosure is more costly to a bank than a loan modification, so many banks are anxiously awaiting the details of how the $50 billion will be put to use to help the housing sector. In the meantime, some banks have suspended home mortgage foreclosures until they know how the plan will work.

When the Federal Reserve recently announced its intention to lower interest rates from 1.5 percent to an unprecedented low of 1 percent the hope was that the U.S. economy would receive a much needed boost in the form of increased consumer spending and a corresponding confidence in the economy following suit. The Fed has stated that along with other measures, this lowering of interest rates will help improve the current credit climate in the country and spur on a new period of economic growth.

This lowering of interest rates was actually long anticipated by many financial analysts, although most of them were unsure how low the interest rates would go. The federal funds rate was already lowered several times over the past year, with a half point decrease implemented only a few weeks ago. This most recent lowering of the interest rate puts it at the same level as it was in late 2003 and early 2004. This stands in sharp contrast to interest rates in the latter part of 2006 and the beginning of 2007, when rates reached as much as 5.25 percent.

Needless to say, borrowers throughout the United States have received news of the lowering of interest rates with much anticipation. The Fed, however, is not actually responsible for setting the rates that are paid on mortgages, car loans, credit cards or other types of debt. Nevertheless, its actions do have an effect on how interest rates fluctuate. Mortgage rates for instance increase and decrease along with the bank rates of Fed, and are therefore in a better position to benefit from rate cuts implemented by the Fed. Recent decreases in interest rates could then mean a subsequent decrease in rates for people that apply for various types of home loans such as home equity credit packages, credit cards and adjustable rate mortgages.

On the downside, lowering of interest rates could result in interest rates remaining low on savings and checking accounts, as well as certificates of deposit. This is why it is important for consumers considering these accounts to compare the different banks’ rates.

Deciding on the best bathroom light fixtures or the sturdiest kitchen countertops probably seems like a key part of buying a home. But, really, that’s just the fun part. For some, qualifying for a home loan in the first place is the more difficult task.

Qualifying for a home loan generally depends on your ability to meet two criteria. The first is, quite sensibly, that you are in a financial position to be able to pay your home loan back to the lender. Lenders don’t always make this process easy; they take a hard look at your records in order to determine your ability to pay. The first thing they look at? Your employment.

Many home loan applicants believe that having good employment will lead to their approval for a loan; generally, though, qualifying is more complex than that. Lenders will also look at the length of time you’ve been with your current employer (or at least in your current field). Two years with a particular company or working in a particular field will be considered steady employment, and will help you to present yourself as a good risk.

After looking into your employment history, your home loan lender will then look at how your income compares to your debts after your new mortgage payment has been added in. Paying off as much debt as possible before applying for a home loan is a good idea. Why is this? Because in order to qualify for a home loan, the lender has to feel that you will have enough money to make your all of your debt payments comfortably. If the lender you work with feels that you have too many debts when compared to your income, he or she may decide that it would be better to offer you a smaller loan or a higher interest rate. Or may even decide not to approve your application at all.

Your lender has evaluated your debt and income comparison, and feels that you can make payments comfortably? Next, they’ll take a look at the next standard that successful applicants must live up to: your “willingness to pay.” To decide whether they believe you’ll be willing to pay your home loan in future, they look at your payment history by pulling your credit report. If you have consistently been on time in paying your debts in the past, it will look good on your application for a home loan.

Another important aspect a lender will keep in mind when deciding whether or not to approve you for a home loan? What your plans are for the home you wish to purchase. If you plan to make the home your primary residence, for example, the lender has good reason to think that you’ll be more than willing to repay your home loan.

If you have never done it, mortgage refinancing can seem complicated. But when you put it simply, the process is easy to understand. When you refinance your home, you are essentially replacing your current mortgage with a new mortgage. In doing so, you use proceeds (or some of them) from the new loan to pay off the balance of the existing mortgage. If the interest rate is lower than when you initially purchased your home, you may be able to lower your monthly payment. Plus, in some cases, mortgage refinancing also lets you “cash out” some of the equity you have built up in your home. This allows you to use the equity for improvements or other expenses without having to sell your home.

Here’s an example of how mortgage refinancing works: When Sarah purchased her home a year ago, she financed it with a 30-year fixed rate loan. At the time, she signed up to pay a 7.0% interest rate, but later this year, the rate fell to 6.5%. While a savings of 0.5% might not seem significant, refinancing at that rate would lower her payment by about $600 per year on the $150,000 loan.

Before you can decide if mortgage refinancing makes sense, you have to compare the savings to the costs of refinancing. In the example above, if you had to pay $3,000 (roughly 2% of the total loan) to refinance then it would take 5 years ($3000 / $600 = 5) to cover the cost of refinancing.
More Considerations

When you start to consider mortgage refinancing for your home, there are several important factors to keep in mind. Though interest rate seems like the most important aspect of mortgage refinancing, it is not the only thing that will affect your payment. If you are considering mortgage refinancing, consider the following:

1. The term of your mortgage. Oftentimes, refinancing your home implies extending the term of your mortgage. For example, if you have paid five years of a 25-year loan, you might need to be open to extending your total payments another five years if you select a new 30-year loan.

2. Your current credit rating. If your credit has deteriorated since you purchased your home, you may have trouble qualifying for a new mortgage at a better rate. The rules and guidelines for obtaining a mortgage are becoming more strict; without good credit, it’s more difficult to find a better rate, or qualify at all.

3. You future plans. For those that plan to stay in their homes for an extended period of time, mortgage refinancing can mean significant savings. If, however, you are considering selling your home within one or two years, you may actually lose money because of the closing costs and other fees required to refinance a mortgage. In many cases, it may take several years for the monthly savings to pay back the costs of refinancing.