Refinancing is Popular When Rates are Low

With home loan and lending rates at historic lows, now is the best time to borrow money to make investments that you have always wanted to make but have been waiting for the right time.

Lending rates are at their lowest since 1961, and aren’t likely to be this low ever again.

Although irresponsible lending and borrowing was one of the causes of the economic breakdown in 2008, borrowing is now one of the best options for those who are looking to make investments that will pay off in the future. The Federal Reserve has announced that they plan to keep interest rates as low as possible through the year 2014, but this does not mean that they will stay down as far as they are now. Rates are almost certain to go up over the next few years, making now the best time to borrow money if you are considering it. Here are three great ways to take advantage of low rates. 

  1. Buy a home, rental property, or second home. With home loan rates as low as they have been in history, there has never been a better time to buy than right now. Loan rates have been cut almost in half since the economic crash, and lenders are pulling out all the stops to make it as easy as possible for buyers to get into the home of their dreams. Little or no money down up front, low interest rates, and low or no closing fees once everything has been said and done are just a few of the ways that lenders are trying to get people to buy in this down economy. If you have the extra income, now is the best time to buy additional properties and use them as rentals or vacation homes. Prices are starting to rise back up, and home values are only going to increase as the housing market is on the mend. If you want to buy, do it now.
  2. Refinancing your home is another great option to help you take advantage of low rates. If you bought a home before 2008, you are likely paying an interest rate that is much higher than what is being offered to home buyers now. If you have a rate that is about 4%, you can contact your lender and ask about their various refinancing programs. For example the HARP refinance program is popular as well as . Look for streamline refinance options, as these are very cheap and quick and will help you start saving hundreds of dollars right away.
  3. Improving your home is one of the other ways that you can take advantage of low rates and still make a profit on your investment. Borrowing money on a home improvement loan is a great way to get a low rate and add value to your home. Consider remodeling the kitchen, adding another bedroom or bathroom, or finishing the basement and adding hardwood floors. All of these improvements can be funded with a home improvement loan and will add significant value to your home if you ever want to sell.

With the low rates that are available now, there has never been a better time to borrow and make your financial dreams a reality. Be sure to shop around with different lenders (and make sure they are FHA and HUD approved because that is a popular loan option) to make sure you are getting the best rates. Start looking for the best rate in your area today with one of our loan officers who is waiting to help you.

Refinancing an Adjutable Rate Mortgage (ARM) May Not Make Sense

A friend recently called asking for advice on what to do with his Adjustable Rate Mortgage (ARM). His ARM is scheduled to reset in June of 2009. He has some time to think about this and I commend him for his foresight.

Now my friend can chose to gear up for a refinance into a fixed rate mortgage or he can just sit and wait to see how his rate adjusts later this year. While the refinance option may seem the most logical and safe choice – given the fall in home prices over the past few years, and the cost of a refinance – it may not be the most financially sound decision. On the other hand just sitting and waiting may be the more prudent choice at this point – because the rate may actually fall when the rate adjusts.

The most important thing to understand about an ARM is how the interest rate is derived as it resets. For most adjustable rate mortgage the final interest rate charged to the borrower is the sum of the index value plus the margin charged by the bank (Interest Rate = Index + Margin). In most cases the margin banks charge is fixed for the life of the loan. The number should be on one of the ARM disclosures in the closing packet you received when you closed on the mortgage. So, the variable which influences the final interest rate at the time of reset is the index.

There are many indexes upon which ARM’s are based. The more common ones are the 1-month LIBOR, the 6-month LIBOR and, the 1-year Constant Maturity Treasury Rate (CMT).  Again, the exact index used for your ARM is found in the disclosures you signed at the time of close. Once you know the margin and your index you can then very easily get an idea for how your rate could behave at the time of adjustment. Let me show you how.

For argument sake, lets say the margin on your ARM is 3.25% (fair to assume), and the index used is the 1-month LIBOR (a pretty common index). Which means if you obtained a 5 year ARM back in January 2004 when the 1-month LIBOR was 1.0982% (see chart below) your rate would have been 4.35%.

One Month LIBOR
Now in January of 2009 the rate could be 0.58%. Which means instead of your ARM adjusting upwards you’ll actually see a fall in rate to 3.83%. This is a pretty big fall in rate (more than 0.50%). So your monthly payment is reduced without any closing cost expense and despite any loss in equity you may have recently experienced.

One word of caution is you need to know how often your rate can adjust. Some adjust monthly, others annually. In a time of falling index rates I personally do not see any cause for concern for at least the next 12-18 months. However, you have to be willing to stomach the uncertainty. Look at it this way, as  home prices bottom out and start to rise again, this may be your best way to avoid extra costs and ride out the market until things are on the upswing again.

For those interested in some hard core analysis on this topic, Mike Shedlock recently wrote about how the ARM reset problem has vanished into thin air.  Its a great read with a lot more analysis and thoughts on different indexes out there.

Loan Servicing Transfer vs. Refinancing

From the Arizona Mortgage Guru mailbag:

Question: Well, we just received a notice that IndyMac, who we have a second mortgage with, closed it’s doors. They kindly sent us a notice that they are working with Wells Fargo to offer help refinancing our loan. My concern is this, if we have to go through a “regular” refinance, there is no way we would qualify with our credit being in the dumps. It’s obvious they aren’t transferring our loan to Wells Fargo, but just offering help to refinance. So I’m concerned. I don’t see how they can do that. When calling the Wells Fargo number they provided, I couldn’t get through to anyone. I’ll try again tomorrow. I would appreciate any advice.

Thanks,

Jen

Dear Jen,

Sorry to hear of the difficult situation you’re facing. Hang in there. Each bank has different rules to an extent on how they are dealing with the current troubles so I can’t comment on exactly what you’re facing. However,  here is what I know:

1. A bank can not force you to refinance in the sense that they can not call back a loan unless you’ve violated some very serious terms. Even then it would have to be pretty bad. This is a rule dating back to the aftermath of the Great Depression. If banks could call back mortgages – in today’s climate – 50-60% of folks would lose their homes – since the vast majority are not in a position to pay back their home loans on short notice without selling the house.

2. Banks can sell the servicing rights – in which case the terms of the loans remain unchanged but only the loan is transferred to a different lender. This doesn’t require you to refinance.

So, with that – I am not sure what exactly Indy is trying to do. I would try to reach someone there and ask them exactly what they are talking about.

I don’t know what else to say really.

Hope that helps. Good luck Jen!

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