Should You Refinance Your Mortgage?

Because of strife in Greece, Spain and North Korea, conforming mortgage rates are back to all-time lows. They're at levels not seen in 50 years.  For homeowners that missed the Refi Boom of November 2009, it's a second chance.
In this well-presented, 3-minute video from NBC's The Today Show, you'll get tips getting low rates and choosing the best time to lock in.
Some of the topics covered include:

• Why were the experts wrong about rates moving higher this summer?
• How much money can you save with a 1 point drop in your interest rate?
• Should you buy a bigger home now that rates have fallen?

The advice in the piece is matter-of-fact and centered.  There is no cheerleading and the message is honest. Mortgage rates are low and they likely won't stay that way.  If you've been thinking about a refinance, talk to your loan officer as soon as possible.

What Happens After the Tax Credit is gone?

Image by reeltor99 via Flickr

With less than a week to go before the tax credit is over, I've been thinking about what the real estate market in Philadelphia will look like for the rest of the year. I was thinking specifically about the real estate market here, because real estate is too local for me to have a sense of what the national scene will look like in May and after.

The tax credit has certainly sped up the market so far this year. All of our offices have outpaced their production for the same period last year (when we were ranked as the number Century 21 company in our area, and number 3 for the state), so its obvious that the tax credit has had some impact. The question is whether is has driven the market or enhanced the market, and my opinion leans towards enhancement. Investors seem to have re-entered our market, and that (to me) is a sing that they percieve value in our real estate. Though activity is speeding up as we near the deadline, my sense is that the market will slow but not stall after the tax credit, because all of the basic reasons to buy a home are in place.

1. Prices are stable and gaining ground. According to Trend MLS, in the first qiarter of this year, closed transactions were up almost 10% (9.6% actually) and the average sale price actually increased over the same period in 2009.
2. Interest rates remain historically low - I don't think I really have to explain this one. Articles speak about rates going up from 5 to 6% as if that were a lot. People wouldn't be happy unless the bank paid them, but frankly, anything under 9% has always been really indicative of inexpensive money.
3. The financial benefits of home ownership are undeniable in the current market. In a recent article, the New York Times once again published its rent vs. buying calculator, and in our market, with no appreciation and no rental increases, a home buyer still makes out better after only 5 years of home ownership - and any prudent landlord would certainly increase the rent at least a few percent over 5 years!

With all of that going for us, it would seem that we have reason to believe that there will be reasonable activity for the rest of the spring market. Certainly if more jobs are created, and we avoid any major economic body blows, it would seem that we might be headed towards the recovery we have heard so much about.

Simple Real Estate Definitions :APR

APR is an acronym for Annual Percentage Rate.  It's a government-mandated calculation meant to simplify the comparison of mortgage options.

A loan's APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan's interest rate.  It's not.  APR represents the total cost of borrowing over the life of a loan.  "Interest rate" is the basis for monthly mortgage repayments.

The main advantage of APR is that it allows an "apples-to-apples" comparison between loan products. 

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term. In other words, the APR is an artificial index that can be compared to determine which loans have higher or lower APRs, thus indicating the higher or lower cost to the consumer.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method, though the total cost to the consumer is still accurately determined.

More importantly, when calculating APR, "life of the loan" is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer -- as most of them do -- APR comparisons are rendered less accurate. It is possible that a loan with a lower APR might be more expensive if the loan is not carried to the full term and would have had a higher APR if the shorter term had been used in the original calculations.

In other words, APR is just one metric to compare mortgages -- it's not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.

Should I consider a 15 Year Mortgage?

For today's home buyers and homeowners that can manage the higher monthly payments, 15-year fixed rate mortgage rates look attractive as compared to comparable 30-year products.

The 15-year/30-year interest rate spread is near its 5-year high. As a result, the savings afforded by the 15 year mortgage is at its 5 year high also.

Despite lower rates, however, homeowners opting for a 15-year fixed mortgage should be prepared for its higher monthly payments. This is because the principal balance of a 15-year fixed is repaid in half the years as with a standard, 30-year amortizing product.

As compared to 30-year terms, 15-year products repay 3 times as much principal each month. It is this difference which makes the payment so much larger.

Versus a 30-year, 15-year fixed mortgages have a few downsides worth noting. The first is that, because 15-year mortgages are heavy on principal and light on interest, homeowners who itemize tax returns may have to claim a smaller mortgage interest tax deduction at tax time. Balanced against that of course, is the benefit of making much larger principal payments and retiring your debt earlier.

Another negative is that the sheer size of the payment. If you run into fiscal trouble down the road, the only way to reduce the monthly obligation is to refinance into a 30-year product and that costs money to do.

In other words, be sure you can manage the payments over the long-term before you opt for a 15-year term. If you can manage it, though, the rewards are tangible.

At today's rates, a 15-year fixed and 30-year fixed costs $230 extra per $100,000 borrowed.

Is It Better to Take a 15 Year Mortgage?

For today's home buyers and homeowners that can manage the higher monthly payments, 15-year fixed rate mortgage rates look attractive as compared to comparable 30-year products.

The 15-year/30-year interest rate spread is near its 5-year high. That means that the cost of money during the term of your loan is much much lower if you choose a 15 year term.

Despite lower rates, however, homeowners opting for a 15-year fixed mortgage should be prepared for its higher monthly payments. This is because the principal balance of a 15-year fixed is repaid in half the years as with a standard, 30-year amortizing product.

As compared to 30-year terms, 15-year products repay 3 times as much principal each month, which accounts for the greatest part of the payment difference.

Versus a 30-year, 15-year fixed mortgages have a few downsides worth noting. The first is that, because 15-year mortgages are heavy on principal and light on interest, homeowners who itemize tax returns may have to claim a smaller mortgage interest tax deduction at tax time.

Another negative is that the sheer size of the payment. If you run into fiscal trouble down the road, the only way to reduce the monthly obligation is to refinance into a 30-year product and that costs money to do.

In other words, be sure you can manage the payments over the long-term before you opt for a 15-year term. If you can manage it, though, the rewards are tangible. Building equity in your property faster can have a number of benefits, including making a move up easier later on.

At today's rates, a 15-year fixed and 30-year fixed costs $230 extra per $100,000 borrowed.

How Your Settlement Date Can Lower Your Rate

Sometimes, saving money on your mortgage is as simple as picking a better closing date.

It's all about Rate Lock Commitments.

A Rate Lock Commitment is a bank's promise to honor a specific mortgage rate for a specific period of time. They are a lender's prediction of what mortgage markets will look like at some point in the future.

The future is murky, of course, so it follows that the longer the rate lock, the higher the bank's corresponding interest rate.

Banks have to compensate for "time risk".

Rate locks typically come in 15-day increments with the 30-day lock serving as the basis for all other pricing:

• 15-day rate lock : 1/8 percent lower than the 30-day rate lock


• 30-day rate lock : The basis for all other pricing


• 45-day rate lock : 1/8 percent higher than the 30-day rate lock


• 60-day rate lock : 1/4 percent higher than the 30-day rate lock

These aren't exact figures, of course. Spreads between rates can (and do) vary from lender-to-lender. On average, though, they're fairly close.

This is why choosing a closing date is so important to your mortgage rate. A 45-day closing may reduce your rate 0.125% versus a 46-day one.

Assuming a $250,000 home loan near today's rates, that's an annual difference of $236.

So, when negotiating a contract on a home, keep in mind how rate locks work to make sure you get the best rate possible. The shorter the length of your rate lock commitment, the more money you might save long-term.

A second money saving trick is adjusting your closing date towards the end of the month. At settlement you will pay interest from the date of settlement to the end of the month you settle in. For example, if you settle on the 5th of the month, you will pay 25 days interest. If you were to settle on the 25th of the month, you would only pay 5 days interest, reducing the cash needed at settlement by 20 days (or 2/3rds of your monthly interest payment). While this doesn't actually save money, it does help your cash flow at the time of settlement (when money always seems a little tight).

You might think it even smarter to settle on the last day of the month to minimize the interest payment, but with so many people trying to settle then, potential problems seem to pop up in timing which might end up with your settling on the 1st day of the following month if anything gets delayed, costing you even more cash than you wished - so keep a little cushion in there for surprises, and you should maximize your cash flow, have a few days to move before your next rental payment, and breath a little easier.

Follow the Bouncing Mortgager Rates

For the fifth time in a year, rate shoppers learned an important lesson this week: When mortgage rates plummet unexpectedly, they often recover just as fast.

Wednesday, the Federal Reserve's newest $750 billion mortgage market pledge helped to push conforming mortgage rates near their lowest levels since WWII.

24 hours later, however, those rates were expired.

After considering the long-term implications of the Federal Reserve -- literally -- printing new money to service the recession, markets grew fearful that the Fed's interventions will eventually lead to inflation. Inflation, of course, is the enemy of mortgage rates.

So, if you're looking for the explanation of why rates rose as suddenly Thursday as they fell the day prior, this is it. And, in hindsight, rate shoppers might have seen it coming, if only because we've seen the exact pattern 4 other times:

1. After the Fed's "surprise" rate cut in January 2008


2. After the Fannie Mae and Freddie Mac takeovers in September 2008


3. After the Fed announced its first $500 in support in November 2008


4. After the Fed zeroed out the Fed Funds Rate in December 2008

Sharp drops in mortgage rate, it seems, are followed by immediate bounce-backs.

Unfortunately, not every would-be refinancing homeowner saw the increase coming. People that locked Wednesday captured the lowest rates in 6 decades. Everyone else wishes they had.

From day-to-day, we don't know if mortgage rates will rise or fall. Nobody knows that. But, we do know that mortgage rates tend to follow patterns and we've seen the above pattern 5 times now.

When mortgage rates plunge like they did Wednesday, they rarely low for long. When you find a rate you like, get in and get locked as soon as possible. By tomorrow, it's likely to be gone.

In a market like ours, where prices are stable with little decline, even in this most difficult of economies, the low interest rate still is the buyer's best friend. And if you buy for solid reasons, even the rate shifts like these don;t impact you really poorly. As always, It remains better to buy real estate and wait than it is to wait and buy real estate!

Lower Mortgage Rates Require Higher Fees

Another week, another headline screams how mortgage rates have fallen to an all-time low.

Freddie Mac published its weekly mortgage rate survey Thursday and found that the "average" mortgage rate is now 4.96 percent, the lowest since the survey started in 1971.

But, if we look beyond the headline, we find that there's another part of the story worth watching. Mortgage rates are falling but the number of points required to lock those rates is not.

Lenders now require an average payment of 0.7 points to get the 4.96 percent rate from the headlines. That's up from 0.6 percent last week and 0.4 percent a year ago.

A "point" is a fee equal to 1 percent of the loan size.

Therefore, to get access to a 4.96 percent interest rate on a $200,000 home loan, today's lender would require an extra $200 versus last week and $600 versus last year. Today's mortgage borrower would be subject to a $1,400 closing cost in addition to the "typical" closing costs accompanying a purchase or refinance.

This is a period of historically low rates -- there's no doubt about that. However, the cost of getting access to low rates is increasing. The press doesn't always tell that part of the story and it's one more reason to look deeper than the headlines.

(Image courtesy: The Wall Street Journal)

Simple Real Estate Definitions:Refinance

A mortgage is a contract between a lender and borrower, defining the terms by which a home loan must be repaid. 

The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time.  So, when market interest rates fall, homeowners will often exercise their right to an "early payoff" by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment.  When the refinance process is complete, the original lender's loan is paid in full using the money from the new lender's loan and the former's relationship is officially terminated.

There's no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense.  In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision. 

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it's often simpler and less expensive than a comparable purchase transaction.  The paperwork stack is often smaller, too.