Mortgage Loans in a Credit Crunch
Posted by admin on Oct 27, 2009
Because of the credit crunch, the number of applications for new mortgage loans has dropped, and lenders are wary of approving new loans. Many people, both homeowners who want to refinance and new borrowers who want to buy their first house, think credit is so tight that there is no point to refinancing or to applying for a new mortgage loan. However, they may be missing out on a great opportunity. Now may be an excellent time to refinance or apply for a new mortgage.
Why is that? Because the Fed has attempted to stimulate economic growth with a series of rate cuts, leading lenders of mortgage loans to lower their interest rates as well. That can be excellent news for you, leading to much lower monthly payments and a lower overall cost for mortgage loans. If interest rates are now at least two percent lower than they were when you got your loan, now is the time to refinance.
But aren’t banks refusing to approve new mortgage loans? The answer is both yes and no. The mortgage applicant’s credit rating is the deciding factor. Banks are more wary than they have been about offering loans to borrowers with a poor credit rating, and they are using more stringent guidelines for deciding what constitutes a poor rating, but they are eager to draw in new lenders with good credit ratings. If your credit is good, then by all means, apply right away.
If your credit rating is slightly below the zone considered good, then there are a few simple steps you can take to raise it over the next six months. Pay all your bills on time scrupulously, putting them on automatic withdrawal if you can. The ratio of credit you have used to total credit you have available is important, so pay off as much as possible of your current loans and credit card balances. Ignore old advice to close down unused credit card accounts; leaving the accounts open increases the amount of credit available to you, improving your ratio of available credit to used credit. Be especially wary of closing very old accounts, since doing so could shorten your credit history, which you want to be as long as possible. If you take these steps, pay on time for the next half year, and do not take on any new debts (credit card, car loan, etc.), then over the next several months you should see your credit score rise.
As you can see, a crisis in the credit markets can be the perfect time to refinance or to apply for new mortgage loans. Be the attractive would be mortgage holder the banks want to see, and you can get a markedly lower interest rate on mortgage loans. If you are what the banks are looking for, you can indeed benefit from even the worst credit crunch.
Common Jargon of Mortgage Loans
Posted by admin on Oct 19, 2009
Mortgage loans have their own vocabulary, which can seem imprenetrable to a first time homebuyer. While this list is by no means exhaustive, it gives the most common mortgage terms you are likely to run into as you familiarize yourself with mortgage loans.
* Amortizing: “Amortizing” means that the loan is fully paid at the end of the loan term, and the payments are designed to be roughly the same amount for the duration of the loan. Each of the payments of an amortizing loan cover both part of the principal and all of the accrued interest.
* Non amortizing: A non amortizing loan’s payments do not pay off the loan gradually. For instance, a popular type of non amortizing mortgage called a balloon mortgage requires payments that cover only the accrued interest, or may even require that only part of the accrued interest is paid. At the end of the balloon mortgage’s term, the full sum of the mortgage is due, usually as a lump sum.
* Variable rate: The interest rates for mortgage loans with variable interest rates rise and fall with the market. Variable rate loans are good for periods in which interest rates are high, but are expected to drop. Many variable rate loans have a grace period during which the homeowner can convert from a variable rate to a fixed rate loan in order to take permanent advantage of a dip in interest rates.
* Fixed rate: A fixed rate does not change over the life of the loan. Mortgage loans with fixed rates have payments of equal amounts from the beginning to the end of the term of the loan. Fixed rate mortgages are best for when the prevailing interest rates are low and are expected to rise shortly. Fixed rate loans allow homeowners to lock in low interest rates during periods when markets are favorable, then enjoy the low interest rates when the prevailing rates rise.
* Points: Fees you pay for taking out a loan. One point is worth 1% of the value of the mortgage loan. Fees for legitimate mortgage loans should be under 5 points.
* Yield spread premium (YSP): A yield spread premium is a sum the lender pays the mortgage agent for convincing a client to sign a mortgage with a much higher interest rate than the client would normally have received. Legitimate lenders never append yield spread premiums, so if your contract contains a yield spread premium, the lender is trying to scam you.
Home Mortgage Guide: Fixed Rate vs. Variable Rate
Posted by admin on Oct 18, 2009
Now that interest rates are hitting record lows, applying for a home mortgage may be an excellent idea. If you are a first time home buyer, understanding the kinds of home mortgage available to you may be difficult. Here is a guide to the two most common types of home mortgage, fixed rate and adjustable rate mortgages.
The interest rate and monthly payment amount for fixed rate mortgages do not change over the course of the loan. Whatever rate you are given when you take out the loan, that is the rate you continue to pay until you refinance, sell the house, or pay off the home mortgage. You pay a premium for the certainty of a fixed payment since lenders usually charge slightly higher interest rates for a fixed rate home mortgage.
On the other hand, the interest rate for adjustable rate mortgages “adjusts” as national interest rates rise and fall. When the prime rate is high, your mortgage interest rate increases; when the prime rate is low, your mortgage rate drops. Your monthly payments rise and fall accordingly. Because banks have less risk with adjustable rate mortgages, they set the interest rate on this type of mortgage lower than they do for fixed rate loans. They also offer a grace period, typically 36 months to seven years, during which your interest rate does not fluctuate and is locked at an appealingly low rate.
Which type of loan should you choose? Do not immediately be tempted by the lower interest rates of adjustable rate mortgages. How long do you plan to stay in your house? Are rates likely to go any lower during your stay? If you are buying a house during a period of record high interest rates, an adjustable rate mortgage is an excellent idea, since it’s likely that rates will go down. If you plan to resell your house within the grace period of an adjustable rate mortgage, then opting for an adjustable rate mortgage would be an economical way to get a low cost, short term loan. However, if you plan to keep your house for longer than the introductory period, and interest rates are low, a fixed rate mortgage may be the best choice because you can “lock in” the prevailing low interest rate.
Take into account not only your own finances, but the current economic climate, when deciding what kind of home mortgage is right for you. Both kinds of home mortgage can offer you an excellent deal in the right economy.
When Is the Best Time to Refinance Mortgage Loans?
Posted by admin on Oct 14, 2009
Has it come time to refinance? Mortgage interest rates have dropped so low in May 2009 that you may be tempted to refinance. But is it the right time for you?
The first clue that it is time to refinance mortgage loans is that interest rates have dropped at least two percentage points below what you are currently paying. This is a significant enough sum that most people will recoup more in savings than they will pay in refinancing fees. However, your own situation may not fit the formula. If you do not stay in the house long enough for the savings from the lower interest to equal the refinancing fees you paid, you will actually lose money from the refinance.
Lowering your monthly payment is another reason to refinance mortgage loans. If you are pinched financially, cutting the amount you pour into your mortgage each month can reduce your stress significantly. You can lower your mortgage payments by refinancing to a mortgage with a longer term, which means a higher total bill but a smaller monthly bill. Or, if you plan to sell your house within the next few years, you can get even lower monthly rates with a non amortizing loan. If you refinance mortgage loans via a loan that does not amortize, you pay only the accrued interest for a grace period of several years. At the end of the grace period, you must repay the capital at an accelerated pace, or may even need to pay it all off at once. However, refinancing or selling the property before the end of the grace period nets you much lower monthly payments, and you repay the remainder of the loan with the sale proceeds.
If your analysis tells you it’s time to refinance, mortgage interest rates are ideal. On the other hand, if your analysis suggests that you will not recoup your money, refinancing is a poor choice. Wait to refinance; mortgage interest rates will fall again. Either way, your own financial situation is the best and only guide to when it’s time to refinance.
Trend in Refinance Continues for Applications for Mortgage Loans
Posted by admin on Oct 13, 2009
Mortgage loans are looking more attractive to many consumers as the third month of 2009 nears its close, with rates hitting record lows. The rates were even lower than the previous records set in January 2009. In fact, interest rates for mortgage loans are lower than they have ever been since Freddie Mac started keeping statistics on them over 35 years ago. As the inventory of properties on the market remains high, many realtors, builders, investors and homeowners hold their breath to see if the historically low rates encourage some activity in the ailing market. It would be nice if all it took to boost the housing sector was low rates. In a post credit sector meltdown reality, however, banks and lending institutions have now instituted stricter standards. Riskier borrowers that just a couple years ago would have easily been given a loan are not being considered now. Borrowers need to have cleaner credit histories and better credit scores to obtain mortgage loans offered by most banks and lenders. In addition, more money must be put down to obtain the loans. More and more consumers are applying for mortgage loans, but less and less can now qualify.
A lot of experts in the industry anticipate that the low rates will persist in encouraging more applicants hoping to refinance mortgage loans than those wishing to take out loans for new properties. There are still many buyers who are not ready to invest in real estate when they are not sure when it will recover. Others are simply being cautious in the current economy and are hesitant to take on additional financial burdens like mortgage loans. Then, of course, some want to buy but cannot qualify for a home loan under the more restrictive lending standards. Consumers who currently own their homes and wish to refinance have to undergo the same scrutiny as new home buyers. In addition to needing higher credit scores to qualify, homeowners must now have higher amounts of equity to be eligible for a refinance. A large number of lenders now require equity of at least 20 percent. For homeowners who lost equity when real estate values dropped, this requirement can be frustrating. Those applicants who not long ago would have been able to refinance can no longer do it, because they cannot meet the equity requirements. That being said, there are a lot of homeowners who are eligible to refinance and are jumping at the chance to lock in a better mortgage interest rate than that of their original loan. After such dismal real estate times, many in the industry welcome any and all action in the real estate and loan industries, whether it is due to refinancing existing homes or purchasing new ones.