Wednesday, September 21, 2011

Battle of the Terms 30 vs 10yr

It’s time for another mortgage match-up folks. Today, we’ll look at 30-year vs. 10-year mortgages to see how they stack up.
Before we get started, it’s important to note that there are two very different types of 10-year mortgages out there.

There are 10-year fixed mortgages, which have a mortgage term of 10 years. And there are 10-year adjustable-rate mortgages, which have a term of 30 years.
The first type of mortgage is pretty straightforward. It’s similar to a 30-year or 15-year fixed mortgage, just shorter.

What this means, if you happen to be brave enough to go with the loan program, is that your mortgage payment will be quite high.
After all, if you only get 10 years to pay off your entire mortgage balance, you’ll need to come up with some sizable payments to get it down to zero in a hurry.

However, doing so will save you a ton in interest.
The “other” 10-year mortgage you’ll see out there is the 10/1 ARM, which is fixed for the first 10 years, and adjustable for the remaining 20.
This makes it a hybrid ARM because of its fixed/adjustable nature. It also means the loan payments have the ability to adjust both higher and lower once those 10 years are up.

So, are either programs a better choice than the classic 30-year fixed? Let’s see.
10-Year Fixed Mortgages
If you’re really, really serious about paying off your mortgage fast, this option could be for you.

Just note that your mortgage payment will be huge relative to other, more traditional options.

For example, on a $250,000 loan amount, a 10-year fixed with an interest rate of 3% would come with a monthly mortgage payment of $2414.02.
Compare that to a monthly payment of $1787.21 on a 15-year fixed at 3.5%, and a payment of $1193.54 on a 30-year fixed at 4%.
While the payment on the 10-year fixed is significantly higher, you’d only pay roughly $40,000 in interest over those 10 years.
On the 15-year, you’d pay about $72,000, and on the 30-year, you’d pay nearly $180,000 in interest.

That reason right there is why someone would opt for the shorter term. A lower mortgage rate and much less interest paid.

But it only makes sense if you really want to pay off your mortgage fast, and have the means to do it without breaking the bank.

Tip: The difference in rate between a 15-year fixed and 10-year fixed may be marginal or even insignificant, so taking the longer term could provide you with some much needed breathing room.

10-Year ARMs
Here’s where things get misleading. Many mortgage companies advertise 10-year ARMs as if they’re fixed mortgages.

They basically use that initial 10-year fixed period to their advantage when putting together marketing materials.
And mortgage lenders can make 10-year ARMs appear really attractive by touting the low mortgage rates that accompany them.

After all, an ARM will always be priced lower than a 30-year fixed mortgage.
Per Bankrate, the 10-year ARM averaged 3.76 percent last week, while the popular 30-year fixed hit a record low 4.32 percent.
So you can see why a customer may think the 10-year ARM is the better choice.
But the fact of the matter is that these loans are still adjustable-rate mortgages in fixed-rate clothing.
Put simply, if you’re not comfortable with a loan program that may adjust, steer clear.

Friday, September 9, 2011

Mortgage Rates Lowest Ever, Woo.

About a month ago, I discussed whether mortgage rates could drop any lower. At that time, the en vogue 30-year fixed-rate mortgage averaged 4.32 percent, per Freddie Mac data.
Today, expectedly, it hit a fresh all-time low, falling to 4.12 percent. Freddie attributed it to “market concerns over Eurozone sovereign debt default and a weak U.S. employment report for August.”

In other words, more bad economic news we all knew was coming came through the door, putting downward pressure on bond yields, which go hand in hand with mortgage rates.
This was no surprise, given the ongoing negative sentiment that simply won’t go away. The good news is that all the stock market swings are making someone rich, but probably not you or I.

It almost seems orchestrated now, the upswing, the downswing, and repeat. Meanwhile, mortgage rates go up, go down, hover in place, and repeat.
Of course, rates have been trending lower and lower because economic news got progressively worse after a brief bright spot.
But I still believe there probably isn’t much more rates can do in the improvement category. Why?

Well, the 10-year bond yield, which essentially dictates their direction, has a historic floor of around 2%, which happens to be its current level, more or less.
It hit a low of 1.93% earlier this week, but has since risen back above 2%. It’s rock-bottom, at least historically, so chances are it doesn’t get any better.
And, as I mentioned in the previous article, most banks and corporations are much better positioned now than they were when the mortgage crisis first struck.

While things are certainly bad, there’s not really too much new drama. There are a lot of lingering problems that will take a long time to sort out, but probably nothing that would surprise any of us at this point.
That said, mortgage rates on the popular 30-year may flirt with the 3% range, but likely won’t do much more than that.
Does Anybody Care?

Regardless, nobody seems to be interested in the low mortgage rates anyways.
Purchase-money mortgage applications continue to falter, at a time when affordability for first-time homebuyers is at unprecedented levels.
That’s due to a lack of confidence, a lack of employment, and so on. And perhaps a view that buying a home now is like catching a falling knife.
Move-up buyers are screwed because they’ve got no home equity to use as a down payment, let alone to offload their current home, and those looking to refinance are stifled by the same problem, assuming the government doesn’t step in soon.

Finally, mortgage lenders could actually be holding rates a bit higher than they need to be (Chase) to keep demand in line with their reduced staff and risk appetite.
So even if they could go lower, they may not. Either way, I don’t think it’s mortgage rates that are holding us back, it’s housing. It’s just not that attractive anymore.

If you’re wondering whether to lock in your mortgage rate or float it, note that the Fed is considering buying more long-term Treasuries to lower mortgage rates. But this is only expected to lower rates by 0.1 or 0.2 percent.
Again, I see 3.99% pretty much being the bottom for the 30-year fixed. What do you think?