Home Mortgage Refinance Blog

The savings rate in the US is abysmally low; in fact it is negative for the nation as a whole. In 2005, the savings rate was (negative) 0.5%. Americans spent $ 41.6 billion more than they earned. According to economists, this is an unsustainable paradigm and once the economy starts to slow down or goes into recession, bad debts will start to pile up and an economic implosion may occur.

Economists have identified cashing out of home equity as one of the key reason for the low savings rate. In the past few years, rising realty prices and low interest rates have encouraged homeowners to borrow against their homes and utilize the money for consumer spending. However, low interest rates leading to availability of easy money has led to rising realty prices. The recent reversal in the interest rate trend can lead to dip in property prices and panic selling of realty, setting in motion a vicious cycle that may initiate the accumulation of bad debts.

Median home prices in the US rose 24% between 2001 and 2004 with the rate being over 11% in 2004. It has been estimated that consumers pulled out nearly $ 243 billion in home equity in 2005.

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Interest rates on long term mortgages crawled up to a new high for both 15 year and 30 year mortgages. The 30 year rate was up to 6.28% and the 15year rate rose to 5.91%. While the rates have risen only marginally compared to December levels, they are leading to discomfort in the market as long term mortgages were becoming a popular refinance choice. With these rates beginning to crawl up as well, the overall impact on the already flattened realty market will not be conducive.

Long term rates are expected to firm up further and experts believe that the 30 mortgage rates could be close to 7% by the end of the year on the back of the US Fed’s expected increases in interest rates in the next two quarters.

With this scenario in the offing, one can expect stagnation in the US realty markets if not an actual downturn.

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The US realty market seems to be in for a bad time. Both interest rates and realty prices are moving in unfavourable directions after having been favourable for a few years. The chief reason that has led to firmer interest rates is successive hikes in interest rates made by the US Fed. This hike has led to short term interest rates becoming almost aligned with long term interest rates and taking the steam out of ARMs.

Under a low interest rate regime and rapidly appreciating real estate prices, people could keep borrowing against their home and cashing out home equity. That time seems to be over for now. High interest rates on the one hand imply higher monthly outflows and softer property prices imply that additional borrowing is quite impossible. Both factors are working in tandem to cool the markets.

If you are unable to get a regular loan to buy a home, don’t be disheartened. There is something called a sub-prime loan that is usually give to borrowers who are unable to raise prime loans due to problems with their credit history, income levels or age. Sub-prime loans carry a higher rate of interest and may have other accompanying charges that may not apply to a prime-loan.

Under ideal circumstances, if you were able to secure a prime loan, you would have been able to buy the property of your choice. But, if you are willing to compromise a bit, you can actually buy a property that is a little smaller that the one of your choice against a sub-prime mortgage. Since this loan will carry a higher level of interest rate, your monthly outflow will be higher and if you bought the smaller property it would fit into your budget. But, all the same you can become a homeowner.

Sub-prime loans are loans extended by banks to customers at rates and conditions that are inferior to prime loans. These loans are given to customers, who may have a poor credit history or are in the low income bracket or are not eligible for prime loans due to other reasons.

Since the financier considers that it is riskier to lend to such groups, it wants a higher return and it charges a higher interest rate. The loans may also be accompanied by stiffer penalties and charges. Predatory loans on the other hand are different. They may be veiled under the garb of sub-prime loans, but they are offered by financiers, who are termed as loan-to-own lenders. They structure the loans with the objective to finally acquire the property. Their loans usually carry high interest rates, stiff prepayment penalties and high upfront fees, but are well devised so that they stipulate to regulations. These financiers often target older people, who eventually loose the ability to repay and forfeit the property to the lender.

Various states are now in the process to implement laws to curb such predatory practises.

Click here to read more about predatory lending.

On the back of a 50% jump in property prices in Massachusetts the highest in the country, residents took fashionable mortgages, which were extremely attractive when the interest rates were low, but are turning ugly now.

The rapidly increasing realty prices induced buyers to stretch themselves and take the maximum possible loan including 100% financing. With the interest rates having shot up, their monthly payouts have risen drastically and for some the recourse to refinancing is also not possible as they financed their properties to 100% value.

These residents can recourse to selling their properties and closing their loans, but effectively, with the realty markets being on the soft side, these residents will be in a no profit situation. If these residents wait and want to exit their properties later, the realty prices may have actually slipped and they will not even recover enough to close out their mortgage.

Click here to find out more about the plight of the Massachusetts' residents.

According to a new report from Fiserv Lending Solutions, a Las Vegas based organization, realty markets in the US are in for a flattened growth. According to its forecast, median home prices across the US will inch up just 1.6%.

The report also suggests, that cities that experienced high growth in property prices are going to see a dip in prices and areas that were not overheated may grow. According to the report’s findings, Las Vegas will probably experience the steepest dip in its property prices of up to 8.2%. Prices in New York are expected to dip 2.43%, LA 3% and Washington 1.9%.

Areas, where realty prices had stagnated are expected to grow. Prices in Houston are expected to grow by 6.1%, in San Antonio by 8.3% and in Memphis by 7.8%.

These corrections are likely to even out property prices across the US and bring them in line with true values.

Click here to access nationwide forecasts.

If you had take an adjustable rate mortgage to acquire you home, in all probability the applicable interest rate would have adjusted to over 6% after a series of interest rate hikes by the US Fed. It is now a little uncertain if the Fed will raise rates further or hold them steady. An increase in the rate will dent your pocket further and if you have a fixed instalment scheme for your mortgage, you will start loosing equity in your home as a greater part of your payment will go towards servicing the interest component.

While ARM rates have gone up, long term interest rates are quite steady and almost the same as ARM rates. For a homeowner with an ARM mortgage, it may be ideal to get his mortgage refinanced and convert it to a fixed rate loan. In refinancing, the homeowner will be able to cash out some home equity as well.

Click here to see what CNN has to say about the changing interest rate scenario.

If you went if in for refinance a year ago, it was probably for getting a lower rate or for cashing out on home equity. The scenario has changed drastically now. Now, people are refinancing, so that they don’t get stuck with a higher rate.

Also, people are considering a very short term perspective while taking their decisions. The rates are not very high now; the market has experienced rates as high as 8% to 10%. However, what people are uncomfortable with is the fact that their adjustable rate mortgages, for which the interest rates have moved up substantially, may become unmanageable if the rates were to move up further. Thus people want to hedge their position by locking in long term fixed rate mortgages at this point of time.

There is reason to cheer for those who are facing spiralling growth in their adjustable rate mortgages, long term rates have started to soften and are down to 6.10%, although still higher from the previous year’s levels.

This is especially favourable for those who had taken interest only loans, and the payouts for which are about to spiral. They can refinance their existing mortgages in favour of fixed rate loans and hedge their position against future fluctuations.

It may also be an appropriate time for them to cash-out on home equity and utilize the excess amount to either indulge in home improvement or for other purposes.

To read more on interest rates click here.