Home Mortgage Refinance Blog

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.

Click here to read further on interest rates.

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.

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.

You took an adjustable rate mortgage and someone you know took a similar mortgage, and both were identical in structure, but today you find that your monthly payouts are higher than that of the other identical mortgage. You wonder what went wrong and you start scrutinizing your mortgage documentation kit.

The interest rate in an adjustable rate mortgage is pegged to an index. The interest rate will move in line with this index. All these indices will not behave in the same way. Some may be more volatile than the others. The reason why your monthly payout has become higher than that of the other similar loan is because the financial index to which your loan is pegged has moved up more than that of the other loan.

The main indices to which ARMs are pegged include the London Interbank Offered Rate (LIBOR), Treasury Constant Maturity index (TCM), one-year Treasury bill, the 12-month TCM average on the one-year T-bill, and the cost of funds index (COFI) amongst others.

With the interest rates having shot up, refinancing activity in the realty market has become sluggish. The chief product in demand is the 30 year long term fixed mortgage and the runaway activity of the last few years is absent from the market.

Under such circumstances, financiers increasingly have to struggle harder to compete for a shrinking market and are innovating new methods to capture business. Some are increasing their sales force, while others are increasing their geographic reach. Financiers are also attempting to innovate product-variants to suit the customers’ requirements.

To read more about the intensified competition in the mortgage market clickhere

If you are planning on a refinance of your mortgage, ARM is not the best bet due to the prevailing interest rate scenario in the mortgage market. Under normal market conditions, ARMs are usually much below 15 year or 30 year fixed rate mortgages as long term interest rates are higher than short term rates.

However, with the Fed having continuously raised short term interest rates since mid-2004, we have a strange situation at hand. We are faced with something called an inverted yield curve. Thus, short-term interest rates are very close to long term rates.

If you are looking at a refinance period of five years to six years, under the current scenario, a long term fixed mortgage is the best bet as ARMs usually have fixed rates for five years, after which they align with the market. If you were to take an ARM at this point of time and consider a longer tenure, you may be faced by a very risky situation after five years. Hence, until the yield curves normalize their shapes, ARMs should be avoided.