Low like the Lowest ever Low

The ratio of mortgage payment to median family income is the lowest on record, according to a new report from Fiserv.

The company noted that purchase mortgage payments now account for just 13 percent of monthly median family income nationwide, which is the lowest figure since 1971, when data first started being collected.

In Las Vegas, the ratio has fallen to 11 percent from 32 percent!

Back in the first quarter of 2006, when mortgage lending moved at a frenzied pace and home prices only moved in one direction, the national number was 23 percent.

In areas where home prices exploded upwards, the number was probably beyond 50 percent, forcing many borrowers to go with teaser rates tied to option arms while simultaneously stating their income.

That explains why just a year or so later we experienced the worst housing bust ever.
Families Spending Less on the Mortgage

Nowadays, families are throwing a lot less of their income towards their housing payment each month, thanks to the near-record low mortgage rates and the reduced home prices.

Still, there are few buyers out there, evidenced by the continued weakness in purchase-money mortgage applications and faltering home prices.

The big issue continues to be consumer confidence, which has risen and fallen as new economic dramas unfold on a seemingly daily basis.

Until that business is resolved and the job market improves, it is expected that home sales (and prices) will remain flat.

Meanwhile, mortgage underwriting standards are a lot tougher than they had been during the boom, making it difficult for many to take advantage.

Then there are the millions stuck in their current properties thanks to issues like negative equity.
First-Time Homebuyers Rejoice

Unfortunately, this means many people aren’t able to benefit from this somewhat unprecedented situation, namely those with underwater mortgages.

But first-time homebuyers have the opportunity to get in on the cheap and position themselves much better than existing homeowners.

After all, if you buy now for say $200,000 and your neighbor (who isn’t going to walk away) owes $400,000 for a similar property, you’re looking pretty good.

That’s right. The current homeowner is banking on you, the new buyer, to buoy the housing market and get them back in the black. Assuming that happens you’ll experience some kick-butt appreciation.

Just be patient; it may take a while. Fiserv expects home prices to decline 3.6 percent into mid-2012 before rising 2.4 percent in the second half of 2012 through the first half of 2013.

Cash Out?

The number of homeowners who refinanced with "cash out" continued to decline in the third quarter according to information released on Monday by Freddie Mac. Eighty-two percent of borrowers who refinanced their mortgages during the period either maintained about the same loan amount or lowered their mortgage balance by bringing money to the table. During the second quarter 77 percent of refinances fell into this category.

Of those who refinanced, 44 percent maintained approximately the same loan amount and 37 percent reduced the principal balance. Eighteen percent of refinancing homeowners increased their loan by more than 5 percent, Freddie Mac's definition of cash out. Over the period from 1985 to 2010 the average percentage of cash out refinances was 46 percent.

Homeowners took an estimated $5.3 billion in equity out of their homes. This was the lowest amount of equity removed from the system since the third quarter of 1995 and was substantially below the $6.3 billion cashed out in the second quarter. In the peak year for cash out refinancing volume (Q2 2006) there was $83.7 billion refinanced out of home mortgages.

Homeowners had a median rate reduction through refinancing a 30-year fixed-rate mortgage of about 1.2 percentage points or a 22 percent improvement in their rate, saving them about $2,500 over the first five years of a new $200,000 loan. The median rate reduction in the second quarter was 1 percent.

Freddie Mac's figures indicate that the borrowers who refinanced in the third quarter owned homes that had lost a median of 7 percent in value over the median of 5 years that the old mortgage had been in place. As Freddie Mac's House Price Index shows about a 25 percent decline in its U.S. series between September 2006 and September 2001, appraisals that these homes had either held their value better than the average home or had benefitted from value-enhancing improvements

7 ways to hear Not right now

With mortgage rates so low, just about everyone and their mother has at least inquired about refinancing.
Unfortunately, a lot of current homeowners are finding that they don’t qualify for one reason or another.
That said, let’s explore some common reasons why you may be denied that precious refinance. And don’t fret, I’ll also offer solutions.
Lack of Equity/ LTV Restraints
Perhaps the most common reason for denial nowadays is a lack home equity, which translates to a loan-to-value ratio well above what’s acceptable.
For example, a great number of homeowners took out interest-only home loans and option-arms during the housing boom because home prices were only going in one direction. Up.
But once things took a turn for the worse, many of those homeowners had little, no, or even negative equity as a result.
Even those who opted for traditional fixed-rate mortgages may have sapped their home equity by cash-out refinancing repeatedly. Regardless, many of these homeowners will find that they don’t qualify for a traditional refinance thanks to their inflated LTV.
Solution: There are a few government-backed programs, as well as lender-based programs out there at the moment that deal with high LTVs. The most popular is HARP, and soon HARP 2.0 will be released, which has no LTV ceiling. Inquire with your loan servicer or any other lender/broker for details.
Loan Amount Too Big
What if your loan amount falls into the jumbo realm, and you don’t have the special qualities, such as an excellent credit score and a low LTV to qualify? This could make it difficult to get that low rate, let alone a refinance to begin with.
Jumbo loans are a lot more restrictive and come with higher interest rates than their conforming loan brethren. So expect more scrutiny if your loan amount is bigger than most.
Solution: Make it a cash-in refinance by bringing money in at closing to get the loan amount down below the conforming limit. This could also lower your LTV and land you with a lower interest rate! Just make sure you actually want to stay in the house for the long-haul.
Credit Score Too Low
Another common refinance roadblock is a less-than-perfect credit score. And by less-than-perfect, I mean crappy. If your credit score isn’t where it should be, there’s a good chance you won’t get approved for your refinance.
Credit scores below 620 are typically considered “subprime,” and will make qualification difficult, especially at high LTVs. Basically the combination of a low credit score and high LTV is a huge risk for a mortgage lender to take, especially in today’s market.
Solution: There are still options for those with low credit scores, such as FHA loans. You just need to shop around more to find them or enlist a mortgage broker to do the legwork for you. Either way, understand that the mortgage rate you see advertised on TV won’t be the one you receive. So you may want to work on ways to actually improve your credit score before you apply.
Insufficient Income
Another refinance killer is insufficient income. If your income isn’t as high as you said it was when you first got your mortgage during the boom (stated income loan), you may be in for a surprise this time around.
And supplying your actual income to the mortgage underwriter could be a rude awakening, even with the low mortgage rates on offer. If you aren’t able to squeeze below the maximum debt-to-income ratio limit, you’ll be denied.
Solution: While making more money is likely out of the question, adding a co-borrower could help you qualify. Or paying off existing debt. You can also shop around to find a lender with more forgiving limits.
Spotty Job History
This is a biggie, considering how bad the unemployment picture has become in recent years.
If you can’t prove that you’ve been steadily employed, typically for the past two years in a row, the underwriter may deny your refinance application, even if you make plenty and have loads of assets in the bank.
Solution: If you lost your job and resumed working, an underwriter may consider your application if you can document that your income is stable, predictable, and likely to continue. You can also consider a co-borrower for help qualifying.
Absence of Assets
Another toughie is asset documentation, especially with that nagging unemployment situation mentioned above.
If you don’t have sufficient, seasoned asset reserves to show the underwriter you’ll actually be able to make your monthly mortgage payments, you may be denied that refinance.
So it’s very important to put money away early and often into a verifiable account. Your mattress isn’t verifiable…checking and savings accounts, stocks, bonds, retirement accounts, etc. are.
Solution: Even if you don’t have the necessary assets, asking a friend or family member for a short-term loan could work. Just move the money into your own account several months before applying for the refinance to avoid getting the third degree from your lender.
You Listed Your Home
If you happened to list your home for sale, then quickly realized no one was interested, you may now be pondering a refinance. Unfortunately, your prospective lender probably won’t be too thrilled about it, considering the fact that you may sell again if given the chance and prepay your new loan. You may also run into problems when it comes time to appraise the property if it wasn’t selling at your asking price.
Solution: Call around and see which bank or lender doesn’t mind that the home is/was listed. Then remove the listing before you apply to ensure there aren’t any complications. And be prepared to write a letter or explanation regarding the “change of heart.”
In closing, these are just a few of the many, many ways you may be denied a refinance. This isn’t 2006. It’s 2011. And times have changed considerably.
Believe it or not, you actually need to qualify for mortgages these days. So do your homework and tie up any loose ends early on to avoid problems during the loan process.

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.

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?

Rate vs Price

Today we’ll take a look at the impact of both home prices and mortgage rates on your decision to buy a piece of property.

Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint), but also how much house you can afford.

Mortgage Rates Still Low

At the moment, mortgage rates are very close to historic lows, with the popular 30-year fixed-rate mortgage averaging 4.55 percent last week, according to data from Freddie Mac.

But while rates are low, home sales are still pretty flat, thanks in part to high unemployment, a lack of consumer confidence, and perhaps inflated home prices.
Yep, even though home prices are well off their housing bubble peaks, many feel they’re still inflated.

This is made clear without the use of home price indices, fancy calculators and algorithms…just take a look at some listings and you’ll think home sellers are nuts for asking so much.
Problem is most of them are asking for prices below their mortgage balance (short sale) and still aren’t getting any bites.

Home Prices Inflated
You can’t really blame them, as most bought during the boom at ridiculously inflated prices or bought pre-boom, and subsequently refinanced to tap into all that wonderful home equity.

Getting back on point, home values have lost about a decade’s worth of appreciation, and are currently coupled with near-record low mortgage rates.

Home prices are predicted to be pretty flat over the next several years, but mortgage rates are expected to rise.

So should you buy now while rates are low and prices have foreseeable downward pressure, thanks to all that distressed/shadow inventory and lack of confidence?
Or should you wait it out and let home prices hit bottom first?

(How to get a mortgage?)
Well, first things first, it’s nearly impossible to buy at the bottom. Anyone will tell you this, whether it’s a home or a stock or anything else.
Predicating the absolute bottom, or even close to it, can be a tall order.
Home prices are also regional and local, so it’s not like home prices have fallen by the same amount throughout the country.

And not all home prices in the nation can be designated as cheap, average, or expensive – they vary tremendously.
At the same time, it’d be hard to argue that mortgage rates nationwide aren’t super low and only expected to rise.

That said, let’s look at a scenario where mortgage rates rise and home prices slump.

Example:
Sales price: $400,000
Loan amount: $320,000 (20% down = $80,000)
Mortgage rate: 4.50%
Mortgage payment: $1621.39
Total paid: $583,700.40

Now say home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.50 percent to 6.00 percent, which isn’t necessarily unlikely.

Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment: $1726.71
Total paid: $621,615.60

So as we can see, buying the home at the current higher price with the lower mortgage rate results in both a lower monthly mortgage payment and significantly less interest paid throughout the loan.

That could also make qualifying easier with regard to the debt-to-income ratio requirement.

However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to homeownership if assets are low.

But we’re still looking at savings of roughly $30,000 with the larger, yet lower-rate mortgage.

Hopefully this illustrates the importance of low mortgage rates. Of course, there are a ton of variables that can come into play.
Most people move or refinance within seven years or so, making the interest savings unclear.

There’s also the thought that once interest rates rise, they’ll put more downward pressure on home prices, meaning property values today are artificially inflated based on the low rates, which has somewhat increased demand.
And who knows, maybe rates will stay relatively low and home prices will fall even more than expected over the next few years.

“Second mortgage vs. home equity loan.”

It’s time for another installment of “mortgage match-ups.”

Today’s match-up: “Second mortgage vs. home equity loan.”
This is an epic battle of the junior liens, which while subordinate to their first mortgage brethren, can still hold their own in a fight.
But in this duel, we’re probably doing more to “clear things up” than we are comparing two loan programs.

Are second mortgages and home equity loans the same?
You see, when it comes down to it, most second mortgages are home equity loans. And vice versa.
So if you hear someone talking about one or the other, they could be talking about the same thing.

This is further complicated by the fact that most home equity loans are HELOCs, or home equity lines of credit.
Confused yet?

You should be, considering the ambiguity of it all…let’s break it down.
Second Mortgages, HELOCs, Home Equity Loans
A second mortgage is any home loan that is subordinated behind (comes after) a first mortgage.

This could be a HELOC or a home equity loan.
A HELOC, as previously mentioned, is a line of credit. In other words, you get a home loan with a certain line of credit, or draw amount, which you can use kind of like a credit card.

HELOCs are tied to the variable prime rate, and thus are adjustable-rate mortgages.
After the draw period, the amount drawn upon must be paid back during the repayment period.

*Note that while a HELOC is often used as a second mortgage, it can also be a stand-alone first mortgage, taken out by the homeowner when their mortgage is free and clear, or to refinance an existing lien.
Finally there’s the home equity loan, which can refer to both a HELOC or a closed-end second mortgage.

A “closed-end second mortgage” is a home loan that operates similarly to a first mortgage in that it’s a fixed amount, not a line of credit.
Additionally, it can be a fixed-rate mortgage or an ARM. These are typically taken out as an alternative to a HELOC, especially as purchase-money second mortgages.

For example, a borrower can avoid paying mortgage insurance by taking out a first mortgage at 80 percent loan-to-value and a concurrent second mortgage for the remaining 20 percent.

Unfortunately, many banks and mortgage lenders use the phrase “home equity loan” and “HELOC” interchangeably, adding to the confusion.
To ensure you actually get what you want/need, ask the loan officer or mortgage broker to explain the terms of each loan product clearly.