It is very important that you get the right home loan when getting a house. It is easy to decide which one you want to use, once you have an understanding of what they are.

A fixed rate loan has an interest rate that never changes through the life you have it, no matter what the market is doing. You will always pay the same thing every month, and you can budget the mortgage payment out easily. The main drawback is that you will pay more for the interest then other types. It is great to help you when the market is bad, but you will not get any benefits if the rates drop.

If you want to lower the interest payment, then an adjustable rate loan is a good choice. These start out with a fixed level for a short time, then the payment will change depending on the economic environment, and they can go up and down. This can benefit you or cause you to spend more, but the interest rates are much lower.

A reset mortgage can also be beneficial. Also called a balloon loan, these allow you to have the lower rates of the adjustable rate, but will never change. Usually after 7 years, they balance will be due. Since most people cannot afford this large payment, they then refinance the balance that is owed.

You need to take time and consider all of the types carefully before making a choice. They each have pros and cons, and one may work better for you then another type. You also need to shop around to get the best rates.

Finding the right home loans will take some time to research them fully and get the best rates that you can. By preparing, you can enjoy your home for many years knowing you have a loan you can afford that will work best with your financial situation.

Interest rates are at historic lows but cyclical trends suggest they will soon rise. Home buyers may never see such a chance again, writes Marc Roth By Marc Roth.

Well, you may not be stupid or broke. Maybe you already have a house and you don’t want to move. Or maybe you’re a Trappist monk and have forsworn all earthly possessions. Or whatever.  But if you want to buy a house, now is the time, and if you don’t act soon, you will regret it. Here’s why: historically low interest rates.

As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That, as the graph above—which you can find on Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.

In fact, rates are so well below historic averages that it should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity. And it is exactly that, based on what the graph shows us. Let’s look at the point on the far left.

In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers.  But they weren’t happy soon thereafter.  From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one of my previous articles, my dad was one of those unluckily stuck needing a loan at that time.

Interest Rate Lessons

And when rates started to decline after that, they took a long time to recede to previous levels.  They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990.  For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%.  We’ve since spent the last nine years, until very recently, at 6% to 7%.  So you can see why 5% is so remarkable.  So, what can we learn from the historical trends and numbers?

First, rates have far further to move upward than downward; for more than 30 years, 7% was the low and 18% the high.  The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years. 

Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low. 

Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.  Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed.  While different in each region, for the sake of simplicity, let’s assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide.  

Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.  Loan Costs Stay with me now.  We are at 5%.   As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again.  If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000. 

Let’s put that into perspective.  You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs).  You would like to own a $240,000 home.  However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring).  Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool.  In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the time you decide you are ready to buy.  And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months. 

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000.  At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger. 

What I’m trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home.

If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.

Source: Business Week

Are you on “The Fence?”If you are, it looks like you’re not alone. Applications for home loans fell the last few weeks of October as average reported rates for a 30 year fixed rate rose above 5.00% according to the Mortgage Bankers Association of America. The reason most cited for the decline was increasing rates. Many prospective home-buyers may feel that either the rates will fall below 5.00% again or that perhaps a rate over 5.00% is simply not that attractive.

But let’s put this all in perspective. If we look back in time at home loan rates from 1980 through today, we’d see the average monthly reported rate for a 30 year fixed rate loan according to Freddie Mac was 9.07%. While the thought of a rate above 9.00% seems inconceivable today, rates below 7.00% were an abnormality prior to 2002! We’d also like to point out that years ago, it was the norm to pay discount points to obtain a rate that was palatable. Today, a borrower can usually get a great rate and pay no out-of-pocket points or fees!

Let’s also remember why rates are as low as they have been this year. When the Mortgage Backed Securities market did a nose dive, the Federal Reserve stepped in and began to buy up these bonds which sent rates plummeting. However, this buying spree cannot last and when the Fed wraps up its MBS purchase program which is scheduled for March 31, 2010 it is not inconceivable to believe we will see interest rates well above 6.00%. While rates today may appear a little less attractive based on where they had been earlier this year, do not let that cloud your judgment. Any home with a rate in the 5.00% range is a fantastic rate when all things are considered.

Let’s look at some figures for comparison’s sake. If you wanted to borrow $150,000 for 30 years a rate of 5.25% would yield a monthly principal and interest payment of $828. The average interest rate of 9.07% since 1980 would give you a payment of $1214 – nearly $400 higher! And if we really wanted to look back at the average interest rate in 1981 which was 18.45%, your payment would be a whopping $2,316 per month, which is $1488 more per month in case you don’t have a calculator handy. Now consider that today for a similar payment you could borrow $417,000 at 5.25% and still pay $13 less per month!

Admit it. We’ve become spoiled with the best home loan rates we have ever seen. While everyone would love a 30 year fixed rate that starts with the number four, do not let rates off their lows deter you from making a decision that could save you thousands of dollars over the time you may have your next loan in effect.

As for home prices, it’s no secret they are the most affordable they’ve been in years even if the bottom has already been seen (and some would argue that the bottom is still coming). This coupled with the above oasis of attractive interest rates makes now the perfect time to get off that fence and speak with a professional who can assess your situation and help you make a decision that is in your best interest. In order to make the best decision and take advantage of rates that historically will be viewed as the lowest we may see in our lifetime, sooner is better than later to pick up the phone. Regardless of what happens to home prices, we do know that interest rates are on the rise. The Federal Reserve will end their program for purchasing Mortgage Backed Securities next March putting pressure on home loan rates to rise.

So what are you waiting for? The fence is never a comfortable place to sit – the sofa in your own home is much better!

For more information visit our website.

~Cari

As mentioned yesterday, I am going to discuss the possibility of refinancing my primary residence. Before I go into the details I first want to discuss the reason to refinance as well as some things to consider before you refinance.

Reason(s) to Refinance-To lower your interest rate is really the only reason to refinance. Lowering your interest rate will obviously cause your payment to decreasing, thus increase cash flow if desired. However, lowering the payment period (IE from a 30 year to a 20 year mortgage) without lowering the interest rate is unnecessary. Instead just pay off the longer term mortgage like the lower term mortgage and you will pay it off in the same time you would without the closing costs.

Things to consider before refinancing:

1. What is my breakeven point? This question could be rephrased as, how many months will it take to recover my closing costs? Since all closing cost are either paid up front at the time of the refinance or rolled into the new mortgage, you will want to know how many months will it be before the lower payments make up for the closing costs. To determine your breakeven point, take your closing costs and divide them by the difference between your old payment and new payment. That number is the number of months it will take you to break even on your refinance.

2. How long are you planning to stay in the house? If you are planning on moving in the next 12-24 months and your breakeven point is 36 months, then it would be unwise to refinance.

3. Am I getting the best rate on the market? Do not simply refinance with your current lender just because you get something in the mail from them offering you a lower rate then what you already had. Check websites like Bankrate and Lending Tree and see if you can get a better rate elsewhere.

4. What kind of loan am I getting? I do not recommend anybody get anything except a fixed rate loan. Especially in the 4.5%-4.75% world we currently live in. Adjustable Rate Mortgage (ARM’s), Interest only, and Balloon Mortgages might offer a lower interest rate initially but are more risky over the long term and can adjust upward. Why not lock in a low interest rate now with mortgage rates at the lowest they have been in 40 years? Another thing to look at it how many points am I paying? Points are simply prepaid interest that is paid at closing. 1 point means that you will pay 1% of the loan value upfront at closing. Points will then lower your rate, but unless the difference in rates is significant (.375-.5%) it might be better for you to pay no points and not prepay the interest.

5. What is my home’s current value? This is important to know before you start the process because due to the housing bubble popping, many homes are now underwater. This makes it virtually impossible to refinance your mortgage unless you can bring a large sum of $$$ to the table at closing to bring the loan amount to what the house is worth.

With rates being as low as they have been in years, now is a great time to refinance. Has anybody got any other suggestions or recommendations to consider before refinancing?

Early next week I will post my analysis on whether or not I should refinance my 6.1% mortgage based on my amortization schedule that I’ve calculated.

Good news on the mortgage front as there seems to be no end in sight to keeping the discount rate at its current levels.  This news bodes well for interest rates.  The next threshold to break through will be 3.28% on the 10 year note.

Our rate alert service expects the ten year note to drop to 3.10%, which should mean rates below 5% for a 30 year fixed rate loan.

Stay tuned!