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.

OCWEN a Win?

Loan servicer Ocwen Financial Corporation has launched a new loan modification program aimed at helping borrowers with underwater mortgages.
The new initiative, known as the “Shared Appreciation Modification” (SAM) program, writes down an underwater borrower’s principal balance to 95 percent loan-to-value, thereby creating home equity.
Then, over three years, the written-down portion is forgiven in one-third increments, so long as the homeowner stays current on mortgage payments.
Later, when the house is either sold or refinanced, the borrower must share 25 percent of the appreciation with the investor of the loan.
Ocwen believes this approach won’t reward borrower delinquency, which is always a concern when offering a loan modification.
“Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity,” said Ocwen CEO Ronald Faris.
“That’s a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it’s important too. Our analytics tell us that an underwater mortgage is one-and-a-half to two-times more likely to default than one with at least some positive equity.”
The SAM program was initially launched on a pilot basis back in August 2010, sporting a 79 percent borrower acceptance rate and just a 2.63 percent re-default rate.
Ocwen now has clearance to make it available to qualified customers who are experiencing negative equity in 33 states.
While it seems like a good approach to an ongoing problem, there are probably still scores of borrowers who are beyond the point of no return.
But it does seem to be a bit more strategic than the Making Home Affordable program, which has fallen well short of goal.

The Pro's of the aRM...

While everyone always seems to focus on mortgage payments adjusting higher, there are a number of reasons why a mortgage payment may decrease.
No really, there are, so let’s take a look shall we.

Mortgage Payments Decrease on ARMs

If you have an adjustable-rate mortgage, there’s a possibility the interest rate can adjust both up and down.

You may have seen that now infamous interest rate reset chart, the one that shows billions of dollars worth of mortgages resetting from their fixed-rate period into their adjustable period.

Well, the damage may not be as bad as it appears because many of the mortgage indexes tied to these loans are rock bottom.

As a result, some homeowners who stayed in these seemingly “exploding ARMs” may actually see their mortgage payment fall.

When You Pay Down Your Mortgage

If you decide to pay off a large chunk of your mortgage, you can ask the mortgage lender to recast your loan (if they allow it).

This essentially re-amortizes the mortgage so the new, smaller balance is broken down over the existing months left on the loan.
Your mortgage payment is adjusted lower to reflect the smaller principal balance, but your mortgage rate doesn’t change.

While this could increase household cash flow, you may be better suited to pay off your mortgage early by making your old payment despite the lower balance.
Refinance to a Lower Rate

Here’s a no-brainer. If you want a lower mortgage payment, look into a rate and term
refinance.

Because mortgage rates are still very low, your mortgage payment will probably decrease if you refinance now.
(When to refinance a mortgage?)

Shop Your Insurance, Look Into a Tax Reassessment
Finally, be sure to shop your homeowner’s insurance, as it is typically included in your mortgage payment.

If you can snag a lower premium, your mortgage payment will decrease as a result.
Also look into a tax reassessment of your home.
Property values have been on the decline, so you may be able to save some money on property taxes by asking your county recorder’s office to reassess your property.
Remember, a mortgage payment is typically expressed as PITI, which stands for principal, interest, taxes, and insurance.
So address each component to save money on your housing costs.

Underwater #'s

For the second month in a row, more than half of respondents think they’re upside down on their home.

The numbers aren’t as bad as June, when an all-time low of 45 percent indicated they were “right-side up,” but it’s still only the third time the number has dipped below 50 percent.

(What is an underwater mortgage?)
For comparison sake, 61 percent believed their home was worth more than their mortgage back in late 2008.

Government Workers More Upbeat
Interestingly, 71 percent of government workers believe their home is worth more than their mortgage, compared to just 50 percent of private sector employees and 42 percent of retirees.

With regard to mortgage payments, just seven percent said they’ve missed one or been late in the past six months.

And only eight percent of homeowners say it’s “at least somewhat likely” they’ll miss a payment in the next six months.
So that’s the good news – borrowers will continue to make on-time payments with the belief they’ll eventually gain home equity and get out of this mess.
The national telephone survey of 676 Homeowners was conducted between July 17-18.