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The End of the Low Interest Rates Era in Sight?

 

April 02, 2013  |  Loan-America.com Insights

There may be some potential changes to the ultra-low interest rates in the US in the near future. Read below to find out how to take advantage of them while they’re still around. 

The economy, labour markets and stock indexes are all showing conservative yet positive signs of recovery. Many believe the policy interventions of the U.S. Fed have played a big role in facilitating this recovery. 

Some analysts and policy experts, however, have begun questioning the long term fiscal soundness of the easy-money policies for the economy. Most are afraid that the policy response to this crisis may fuel yet a new crisis all together!

To date, to ward off deflation and jump-start the economy, Ben Bernanke, the Chairman of the US Fed, cut the Fed’s benchmark interest rate to zero in 2008 and has since pursued unconventional economic policies – such as buying back junk mortgages – to drive down longer-term rates.

One risk many analysts have pointed out in pursuing a prolonged easy-money and ultra low interest rate policy is that it could indadvertedly encourage speculative activity, undermining the very process of restoring sustainable growth and financial stability to the economy. 

Another risk that some economists have highlighted is the rise of “reaching for yield,” which is a term that applies to investors taking on more risk in their quest for better returns. This becomes more common during low-interest periods, such as the present, when traditionally safe assets offer lower rewards. If interest rates change quickly and investments are illiquid, the added risk could lead to unsustainable liabilities in one’s investment portfolio.  

Finally some analysts believe that given such low interest rates for borrowing, the government also has little to no incentive to cut back on its spending in the short term but will be faced with a sizeable debt in the long term . A that point, given the rate of spending, interest rates are surely to go up to help make appropriate corrections to the macro economic context. 

Given the most recent economic activities, most analysts are unsure if the current stock-market highs, for example, are signs of economic strength to come (i.e. investors being forward-looking) or a reflection of the makings of another bubble. 

Though many experts still see how the short term benefits of pursuing these policies probably outweigh the costs, in light of these insights, may are also concerned that the path being pursued is unsustainable in the long term.

 

How to Take Advantage of these Rates and Circumstances

Though there is little consensus amongst experts that the current policies may lead to a full blown bubble, there are legitimate concerns that we believe the government will take into consideration. The most relevant of which to consumers is that ultra low interest rates will probably rise to normal standards in the long term. In other words, these rates may not be around for much longer. 

In light of this, Loan-America would like to strongly encourage potential consumers to take advantage of the current circumstances and try to enter the housing market as a first time buyer or re-financing an existing mortgage at a lower fixed rate as soon as possible

For help with securing low interest rate mortgages in the California region or other guidance about the right products for home buyers, please call 1-888-LOAN-800 to arrange a consultation or visit us at http://www.loan-america.com/. We’re a trustworthy Californian mortgage company helping ever day consumers refinance their mortgages and make smarter real estate decisions. We look forward to helping you!

 

Sources:

http://news.yahoo.com/former-top-economic-officials-fret-asset-bubbles-195623013--politics.html 

Should You Refinance Your Mortgage? Tips, Tools and Insights to Help you Decide

 

January 21, 2013  |  Loan-America.com Insights

 

If the current hype of today’s real estate market has you thinking if you can save some valuable money by refinancing your mortgage, this Loan-America blog will hone in on some key factors you need to consider before going down this track.

Though interest rates are a key consideration, a number of other factors are equally important when deciding whether to refinance. The length of time you plan to stay in your current home, the costs associated with getting the new loan, and the amount of equity you have in your home, as well as other things are good places to start.[1]

Tempted by the potential savings illustrated below in the chart? See if you can clear the following 3 hurdles to know if refinancing is right for you:

 

An Example of the Potential Significant Savings Opportunity [2]

describe the image

 

1. Do you qualify?

Prior to starting the entire process, review your credit report to make sure that you'll first qualify for lower rates.

For those potential borrowers that are unsure or have poor credit, refinancing may not be their best route, since a bad credit score can often translate into higher refinancing rates. In fact, most industry experts believe you’ll need a credit score of at least 720 to get the best rate and some argue that "for every 20 point drop in credit from 740, you pay higher in closing cost, interest rate, or both - almost by 2 percent or more...”. This can completely negate any marginal savings accrued over time from securing a lower interest rate.[3]

That said, even if you don’t have the best credit, some experts argue that borrowers aren't powerless in the process. To help improve one’s chances at securing a good refinance deal, one should start with shifting assets to one’s mortgage lender, cleaning up outstanding bad credit and understanding the new government programs.[4]

Other helpful hints at potentially improving your credit score in the short run include paying part of your credit card balances, generally maintaining a balance less than 30 percent of the available credit on your card, and checking for errors and reconciling them prior to an application.[5]

 

2. What are the associated costs?

If credit isn’t an issue, the next thing you want to consider when thinking of whether or not to refinance your mortgage, assess the kinds of costs involved and compare this against how long you plan on being in the home for. This is critically important because closing costs typically total about 1% of your new mortgage's principal, and amy amount to thousands of dollars, covering such things as home appraisals and lawyer's fees. According to the Federal Reserve, “it is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees," including but not limited to application fees, loan origination fees, appraisal fees, and more. "These expenses are in addition to any prepayment penalties or other costs [you would incur] for paying off any mortgages you might have." A prepayment penalty "is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing," according to the Federal Reserve.[6]

You want to know what these costs will add up to in order to calculate your break-even point if you were to refinance.

Costs can vary and there are several ways lenders work these fees into refinancing deals, including:

1) Upfront charges. The traditional way of paying for closing costs, which involves simply paying with a certified check.[7]

2) "Rolled-in" closing costs. With this option, the bank adds all closing costs to your new loan's balance rather than making you pay upfront. Consumers won't spend any money out of pocket, but will pay slightly higher mortgage bills each month throughout the loan's lifetime.[8]

3) No- or low-cost refinancings. These deals often don't charge any closing fees, but they carry higher interest rates, which compensates the lender for including your new loan's closing costs.[9]

As a rule of thumb, generally If you plan to possibly move out in three years or less, a refinancing deal may not make sense for your circumstances simply because replacing an existing 30-year loan with a new 30-year loan may take months of lower-cost loan payments to make up all the upfront costs involved in the refinancing process. That is precisely why it is crucial to determine in advance how long you plan to stay in the home to then assess if the cost involved in refinancing are worth securing the lower interest rate.[10]

 

3. Do you have any equity?

After determining the costs involved and your credit-worthiness, borrowers need to assess how much equity they have in their homes. Surveying banks across the US, it appears that most banks will require 20% equity in order to refinance a mortgage. Though we’ve found some examples where it may still be possible to refinance without that much equity, we’ve found that you'll likely get the best deal if you have at least 20% equity.

Some good news -- for victims of the sub-prime mortgage scandal or borrowers with loans backed by government-controlled mortgage companies Fannie Mae and Freddie Mac the Obama administration has pushed for making it easier to refinance, even if borrowers don't have any equity in their homes or strong credit. For example, changes taking effect this year will allow borrowers who owe more than 125% of their home's value to refinance to lower, more affordable rates under the government's Home Affordable Refinance Program, or HARP.[11]

 

Some Potential Downsides:

If after clearing these three major hurdles, you still feel refinancing is right for you, consider the following:

1. It’s a time consuming process. Given the favourably low interest rates and hot refinancing market, mortgage transaction pipelines appear clogged, which means it now takes the nation's biggest mortgage lenders more than 70 days to complete a refinance, on average, according to the consulting firm Accenture, up from 45 days a year ago. Some big lenders routinely advise borrowers that their refinance can take as long as 90 days.[12] Be prepared to wait for this period.

2. You’re often starting from scratch. Refinancing can extend the term of the loan as new borrowers are effectively starting from scratch on new 30-year loans. One way to mitigate this is to consider opting for a shorter loan period, which may result in marginally higher mortgage fees. For example, some people are refinancing from a 30-year to a 15-year loan if they already have already built some equity into the home and have a number of years of payments under their belts.

See below for an example of the possible savings one can gain over the life of their loan.

loan comparison 2
  

3. You could consider alternatives to “Refinancing”, such as “Recasts” or “Re-Amortization”

If you may not want to go down the refinance route, you should look into the possibility of modifying your loan terms via either the “recast” or re-amortization” routes.[13] Either of these rare options basically entail modifying your existing loan down to a lower interest rate, but without the hefty upfront costs and the hassles of refinancing.

The only catch is that despite costing at times as little as $250 for application fees, some banks can require borrowers to provide additional sums of money to “substantially reduce the unpaid principal balance of [their existing] loan,”

That said, given the expense and paperwork involved in refinancing, it’s still worth asking considering and asking about.

 

Tips

1) Research shows the average American family moves every seven years. If you are confident that you will not be in your home more than five years an adjustable-rate mortgage may actually be the best course of action for you.[14] A careful analysis based on a projected timeline will help  calculate your break-even point (i.e. how many months it will take to recoup your closing costs), which will be a strong indicator as to whether you should refinance or not. [15]

2) As a general rule, anyone who can find a deal that will recapture the closing costs within 18 months should "just do it.”[16]

3) Another good rule of thumb is that refinance only if you can cut your mortgage rate by 0.5 percentage point or more from what you're paying.[17] The below chart illustrates what 0.5 percent off an existing mortgage can look like over a 10 year spread. Incredible!

loan comparison 3
 


Tools

• Federal Reserve Board’s Guide to Mortgage Refinancing ––> http://www.federalreserve.gov/pubs/refinancings/refinancing.pdf

• Federal Reserve Board Break-Even Calculator –> http://www.federalreserve.gov/pubs/refinancings/default.htm#breakeven 

• Compare Fixed Rate Mortgages to Adjustable Rate Mortgages– http://homes.yahoo.net/mortgage/quote/?kid=1MNR0&ywa=1

 

How Loan-America Can Help

For those who can clear the apparent inconveniences and key hurdles, today's low rates may present a once-in-a-lifetime opportunity.

 

It’s unfortunate to see how many homeowners simply ignore the benefit of refinancing and continue to pay exorbitant mortgage payments on loans with interest rates over 5%. Converting to a lower rate loan today could help homeowners save immensely over the long term. We strongly encourage you to take time to check your loan rate and determine whether it makes financial sense refinance. There are many quality mortgage brokers who will assist you in reviewing your savings at no cost to you.[18]

Loan-America is one of these organisations here to help you determine how you take advantage of these unprecedented and favorable conditions. In particular, for help with securing low interest rate mortgages in the California region or other guidance about the right products for home buyers, please call 1-888-LOAN-800 to arrange a consultation or visit us at http://www.loan-america.com/. We’re a trustworthy Californian mortgage company helping ever day consumers refinance their mortgages and make smarter real estate decisions. We look forward to helping you in 2013!

 

Further Reading

• General info about refinancing – http://financialplan.about.com/od/realestatemortgages/qt/RefinanceOrNot.htm

• Refinancing’s hidden costs – http://realestate.msn.com//article.aspx?cp-documentid=30846683

• Christian Science Monitor’s thoughts on refinancing – http://www.csmonitor.com/Business/2012/0926/Time-to-refinance-your-mortgage-Rates-hit-historic-lows

 


[16] http://homes.yahoo.com/news/pros-and-cons-of-refinancing-20121109.html, interviews with Lou Barnes, a mortgage banker in Boulder, Colo.

US Mortgage Rates Still at Record Lows – How to Take Advantage

 

January 9, 2013  |  Loan-America.com Insights

 

A recap from 2012

Over the last quarter of 2012, we shared exciting news about the US mortgage rates were hovering near record lows in nearly a century, strongly favouring prospective new buyers or consumers wishing to re-finance their existing mortgages.

 In early October, we followed up with reports of unorthodox policies being pursued by the US Federal Reserve (Fed) of “quantitative easing”, whereby the central bank would purchase $85 billion in bonds per month through the rest of the year, and then $40 billion per month indefinitely to help stimulate the economy, and support lending, borrowing and spending by driving interests rates as low as possible until evidence arose to show the economy required less support.

 We argued that these reports suggested that interest rates could remain relatively low for the long-run, and would significantly benefit consumers by increasing their  purchasing power. 

 We also warned consumers that securing financing in the future could be more difficult since government support would not be indefinite since it was heavily policy/politics dependent.

 

The New Year Brings New Market Lows

Earlier this week, The Associated Press broke news that the average U.S. rates on fixed mortgages have once again moved closer to record lows experienced in late 2012, where the average rate on a 30-year loan slipped to 3.34% from 3.35%, 30-year fixed mortgage rate averaged 3.66% and 15-year fixed mortgage ticked down to 2.64% from 2.65 percent, making home buying more affordable and helping sustain a housing recovery.

Already, these record-low interest rates have begun attracting new buyers and persuading many homeowners to refinance their existing mortgages. According to the Mortgage Bankers Association, U.S. mortgage refinancing applications have risen substantially as rates declined. 

However, tightened credit restrictions are barring some borrowers from filing loan applications and taking advantage of these rates.

 

How to Take Advantage of these Rates and How We Can Help

In light of this news, Loan-America would like to remind clients that were here to help you take advantage of these unprecedented and favorable conditions. We strongly encourage consumers to take advantage of the low rates by trying to get into the market or re-financing their existing mortgages at a lower fixed rates as soon as possible. Specifically, for help with securing low interest rate mortgages in the California region or other guidance about the right products for home buyers, please call 1-888-LOAN-800 to arrange a consultation or visit us at http://www.loan-america.com/. We’re a trustworthy Californian mortgage company helping ever day consumers refinance their mortgages and make smarter real estate decisions. We look forward to helping you in 2013! 

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US Mortgage Rates at All Time Low – Great News for Consumers

September 14, 2012  |  Loan-America.com Insights

In today’s US real estate market, mortgage rates are hovering near record lows, some claiming these to be the lowest in nearly a century, which bode well for prospective new buyers or re-mortgaging consumers.[1] 

The mortgage rates for the week ending Sept.13, 2012 include the following:

-  30-year FRM averaged 3.55 percent this week, unchanged from last week. Last year at this time, the 30-year FRM average was 4.09 percent.[2]

-  15-year FRM this week averaged 2.85 percent, down slightly from last week's average of 2.86 percent. One year ago, the 15-year FRM averaged 3.30 percent. [3]

Mortgage Rates 30 year

Factors contributing to keeping US Treasury bond yields low and, in turn, interest rates at unprecedentedly low levels include turmoil in world economy, investor concern with the European debt and bond markets, and a shaky economic recovery back in the US.

In addition, just yesterday, the Fed announced a new policy – “quantitative easing” – meant to stimulate the economy through a round of bond purchases targeting the mortgage market. This entails the central bank purchasing $85 billion in bonds per month through the rest of the year, and then $40 billion per month indefinitely until the economy requires less support.[4] The policy is intended to continue driving interests rates even lower to help support lending, borrowing and spending.[5] The Fed also supported their policy with strong language claiming they would extend plans to maintain interest rates at ultra-low levels through into mid 2015, and continue supporting the economy “for a considerable time after the economic recovery strengthens.”[6]

What does this mean for consumers and prospective buyers? Well, consumers should look to take advantage of the low rates by getting into the market or re-mortgaging their current deal to lock in at a lower fixed rate as soon as possible.

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