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Mortgage rates » loan

15 year Mortgage Rate Discussion

Purchasing a house can be a bit daunting for first time buyers. Often times, they are not financially equipped to do so. They still possess a lot debts and liabilities that are draining away their monthly paycheck. And regrettably, quite a few of them do not have much of anything for an egg’s nest let alone to afford a mortgage payment.

Given this situation, they try to engage in ingenious tactics with their mortgages in order to win the pursuit of their dream house. This is the typical scenario in the game called mortgages and home loans under the umbrella of personal finance.

Mortgages may be largely classified into two:

1. Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM)

2. Fifteen and Thirty Year Terms

Fixed Rate Mortgage

The FRM, as the name implies, has the characteristic of a constant and stable interest rate throughout the life of the loan. This option gives protection to the borrower in the event of fluctuating rates particularly when the experts predict (or your gut tells you) that an inevitable spike will occur in the coming months. This is a well-adopted alternative for a middle class American family – conventional and concise figures devoid of hidden rate escalations.

From the inception of the loan up to the completion of the obligation, you will know the fixed amount that will be paid during the entirety of the term. An amortization schedule will be provided to guide the borrower on when the payment will be due. (See Table B and C)

With regards to the interest rate that a homeowner will receive, such will be established by looking into variables like credit scores, loan amount to house value ratio, and debt to income ratio. Each lender’s guidelines differ but the average fractions and requirements are: having at least a 580 FICO score, not exceeding 80% loan to value (LTV), and not more than 50% debt to income ratio. Rates oscillate on a daily basis, sometimes even 3 to 4 changes within the same day. Nonetheless, rates are anywhere between 5% – 7%.

Adjustable Rate Mortgage

With the ARM, there is the chance that one’s monthly payment swells or dives depending upon the motion of the rates whether it be upward or downward. This is usually coupled with fixed rate for the initial duration of the term, normally 3 to 7 years. And from there, it will adjust to the current and existing market rate. A borrower will likely see 3/1, 5/1, and 7/1 ARMs. The first number represents the introductory period with fixed rate while the second number corresponds on how often the rates may change each year thereafter. Taking the 3/1 as an example, the interest will be fixed for the initial 3 years and same is subject to change every year from then on.

More often than not, ARM can be very tempting because of the lower interest rate. Take note that the shorter the initial fixed period, the lower the interest rate is. Another attribute that makes ARM enticing is that the risk is mitigated by caps or ceilings. These caps are generally of two types; there is the periodic adjustment cap, which confines the amount that the interest rate can be adjusted between two predetermined periods. And the other is the lifetime cap, which defines the amount that the interest rate cannot exceed under any given situation.

Terms

It is safe to say that most people realize that getting mortgages with adjustable rates and 50 year mortgages are generally not a good idea because attached to these are lofty interest rates and costs that will create further damage in their pocket. One main thing to remember with regards to mortgages is that the quicker you pay such debt, the less interest you’ll have to pay. With this said, a 15 year mortgage rate sounds better than its 30 year counterpart. However, the shorter the term, the higher the monthly payments are.

Now, how will you choose the ideal mortgage term? This will be answered as we go along the discussion. Let’s take this as an example: $300,000.00 is the full amount of the loan and 10 percent has already been paid as down payment.

Table A

Thirty Year Loan

Fifteen Year Loan

$270,000.00 Balance

$270,000.00 Balance

5.63% Interest Rate (Bankrate.com: April 9, 2008)

5.22% Interest Rate (Bankrate.com: April 9, 2008)

$1,555.12 Monthly Payment

$2,166.21 Monthly Payment

$559,843.20 Total Payment After 30 Years

$ 389,917.80Total Payment After 15 Years

$289,843.20 Total Interest Paid

$119,917.8 Total Interest Paid

Interest Savings: 169,925.40

If you want to know how to compute for the monthly payment of your remaining balance, here’s how.

270,000.00 (remaining balance to be paid in the span on 30 years)

x .0563 (annual interest rate for a 30 year loan)

15,201.00 (annual interest amount)

/ 12 (months in a year)

1266.75

Amortization on the first year for a 30 year loan

Table B

Month

Principal

Interest

Total

Remaining Balance

0

270,000.00

1

288.37

1266.75

1555.12

268,444.90

2

289.72

1265.40

1555.12

266,889.80

3

291.08

1264.04

1555.12

265,334.60

4

292.45

1262.67

1555.12

263,779.50

5

293.82

1261.30

1555.12

262,224.40

6

295.20

1259.92

1555.12

260,669.30

7

296.58

1258.54

1555.12

259,114.20

8

297.97

1257.15

1555.12

257,559.00

9

299.37

1255.75

1555.12

256,003.90

10

300.78

1257.34

1555.12

254,445.80

11

302.19

1252.93

1555.12

252,890.70

12

303.61

1251.51

1555.12

251,335.60

Amortization on the first year for a 15 year loan

270,000.00 (remaining balance to be paid in the span on 15 years)

x .0522 (annual interest rate for a 15 year loan)

14,094.00 (annual interest amount)

/ 12 (months in a year)

1174.50

Table C

Month

Principal

Interest

Total

Remaining Balance

0

270,000.00

1

991.71

1174.50

2166.21

267,833.80

2

996.02

1170.19

2166.21

265,667.60

3

1000.36

1165.85

2166.21

263,501.40

4

1004.71

1161.50

2166.21

261,335.20

5

1009.08

1157.13

2166.21

259,169.00

6

1013.47

1152.74

2166.21

257,002.70

7

1017.88

1148.33

2166.21

254,836.50

8

1022.30

1143.91

2166.21

252,670.30

9

1026.75

1139.46

2166.21

250,504.10

10

1031.22

1134.99

2166.21

248,337.90

11

1035.70

1130.51

2166.21

246,171.70

12

1040.21

1126.00

2166.21

244,005.50

In the figures above, one will clearly see the yawning gap between the total payment for a 30 year rate as against the 15 year rate. Also, the additional payment for a 15 year loan may prove its worth in the long run.

Pros and Cons

To reiterate, the goal in game of mortgage is to be able to pay off the loan as quickly as possible without straining your current financial standing – meaning you can comfortably pay the monthly bills and the mortgage. And as stated in the previous paragraphs, the shorter the term, the higher the monthly payments are. And unless you were able to acquire a fixed rate mortgage, you must be certain that you can cope up with the changing interest rates particularly when it swells. The last thing you want is to have to default on it. And if such activity continues, it may even lead to foreclosure.

Often times, frugal individuals choose the 30 year mortgage. However, they fail to see the whole picture. They only see the monthly figures, which is considerably less than the 15 year loan, and not the interest that is coupled with said mortgage. While logic directs that lower interest rates connote lower monthly payments, it appears that certain aspects of the loan have been overlooked. In a span of 30 years, will this be still applicable? If you’re looking to save, then you’re better off with a 15year loan.

You need to ask yourself, will the amount of interest be reasonable after 30 years? How about after 15 years? Here enters the benefit of having a 15 year loan—diminishing the total amount of mortgage cost. As shown in Table A, the interest difference between a 30 year and a 15 year loan amounts to $169,925.40. This only demonstrates the hefty weight of paying a loan with a term of 30 years.

If you opted for a 15 as against a 30 year loan, you will have the benefit of owning your property in half the time due to the fact that you were able to pay off without incurring any default. Another benefit for having a 15 year loan is that even though the term is 15 years, one can still put additional payments if one wishes to do so. If your finances dictate that you can still place a little amount to pay for the mortgage, then by all means go. If you keep this up, you’ll be able to pay off your loan ahead of time. Just make sure that you leave a note saying that the additional be applied in the principal and not the interest.

However, even with these benefits, a 15 year loan also has its downside, which is primarily the higher monthly payment. With this stated, a huge chunk of your monthly paycheck or disposable income will be allotted to mortgage alone. When the inevitable happens or an emergency occurs, one may have no other option but to incur delay or worse default. And everyone knows that failure to pay results to devastating consequences.

A bigger payment may prove to be burdensome for an individual who has not sufficiently prepared oneself for larger payments. Do not force yourself to pay an amount that is clearly beyond your financial means. Unexpected things may transpire. It is better to be financially prepared and take the long term than being barely able to make ends meet with the additional burden coming from a 15 year mortgage.

Generally, with mortgages, the shorter the term, the better. But it is better that you choose a program that matches your financial capacity. Purchase what you can afford with ease, don’t stretch your budget too much to the extent that it puts you in an awkward position or in a financial crisis.

Equity Mortgage

Equity mortgage is defined as “a mortgage in which a lender offers a favorable interest rate in exchange for a portion of the profits when the borrower sells the home”. Equity is the value of the home minus the payments on the mortgage. This usually happens when the borrower used their home as collateral to secure a large amount of credit. Equity loans can either be (1) home equity loan, also known as a second mortgage where the borrower gets a lump sum that he or she must pay after a certain period of time; (2) home equity line of credit where the borrower is given a credit card that is funded by the home equity. Interest rates are both applicable on the two instances, however, when they start to accrue differs. In a second mortgage, the interest rates start immediately after the lump sum is released while in the line of credit equity, the interest does not accrue until your equity (your home) is purchased.

Advantages of a Home Equity Mortgage

An equity mortgage has the purpose of helping the homeowners in emergency cases and in situations where a large amount of money is required such as in weddings. Usually, homeowners will resort to equity loans or second mortgages for this. Having equity is also a powerful thing because with it, you can buy a summer home, a new car, maybe even go on a vacation.

It can also be beneficial in terms of taxes because you can deduct interest paid on equity loans and equity lines of credit from your income tax. If you want to improve you home by adding a swimming pool, repaint the whole house, building a larger garage, anything to make it increase its market value, you can draw funds from your equity. It can also be helpful in paying off other debts and save yourself from bankruptcy.

It can also benefit senior citizens in supplementing their income as well as funding their healthcare needs. It can secure you and your family a cash reserve in times of need. A home equity mortgage also has a lower interest rate than consumer loans, credit cards and auto loans. A home equity is therefore a very valuable asset.

Disadvantages of a Home Equity Mortgage

There is, however, a danger when it comes to getting an equity mortgage. Because of it being tax-deductible and having a lower interest rate than most loans, some people find it tempting to transfer their existing debt to their equity mortgages. Research has shown that within two years, people who do this will have as much or more credit and consumer loans on top of their equity mortgages.

You also run the risk of losing your home in case you don’t repay your debts. However, as a second mortgage, the prior mortgage would be settled first. There is also a current slump in the American real estate industry so consider the economic situations first before you take the plunge.

Considering an Equity Mortgage?

However, there are certain things that one should consider before embarking on a second mortgage. A mortgage in any form is always a commitment and you are putting your home in line so careful planning is required in this case.

  1. First, determine what type of equity mortgage you’ll be getting. It will depend of course, on your needs. If you have an immediate need for a large amount of money, a second mortgage will be appropriate. If you need to spread your loan over a long period of time (such as in the case of basic necessities), a line of credit would be more proper. Also, read the terms and conditions of the mortgage contract before doing anything. Consult with a lawyer or a financial adviser because as a commitment, you can’t renege on your contract once the deal is done.
  2. Second, choosing the type of equity loan will determine when your interest rate would start. A second mortgage will have the interest running immediately while the line of credit will depend if you sell your home or not. Also, with a second mortgage, the annual percentage rate will be based not only on the agreed interest rate but also on finance charges and other fees. An equity loan based on a line of credit will exclude the calculation of interest rates but there will be fees and service charges.
  3. Lastly, consider your repayment options. Consolidation of your debts could be one. You can also pay off your debts by starting with the interest first and slowly paying off the principal amount. Consider also realistically how much you can pay monthly. It is easy to enjoy the ready amount of cash on the first few months, so plan ahead. Set a monthly amount to pay off your equity loan as well as other debts. The earlier you repay your debts, the lesser chances of you going to bankruptcy.

Sound Tips From Financial advisers

Remember that real estate is also a business. And with business comes profit. You have to consider that you and the lenders aim to get money from this so you have to be very careful when applying for equity mortgage.

  1. Be honest when it comes to your credit information. If you have bad credit history, you cannot hide from it. And you cannot just get an equity mortgage without disclosing the full extent of your credit history. There are three credit bureaus in the United States: TransUnion, Experian and Equifax. They have an extensive record of all your credit dealings and mortgage companies have the power to request this information before they deal with you as borrower. If you do not tell them that you have poor credit, they will think of you as a suspicious person and most likely reject your credit outright. Telling them will give you a chance to defend yourself before they make their decision.
  2. Don’t give your credit information around indiscriminately. If a large number of lending companies ask for your credit rating from the three bureaus, your credit rating will drop a notch. Choose brokers and banks that you think are trustworthy enough to be entrusted with your credit score and which you think will approve your credit.
  3. Scams are very common so beware. There are a lot of unscrupulous people out there and will try to scam you out of your money every chance they get. So be careful when dealing with brokers and private lending institutions. Make sure they have the proper accreditation or choose one that a close friend has used before. This is your home and hard-earned money that we’re talking about so careful planning and research is required.

Real-Life Testimonials

For sale signMajority of the economists and financial advisors today are giving dire predictions of the real estate industry and says that the mortgage market is in upheaval. The equity market which was booming in the early part of the 21st century is now spiraling down. Jay Brinkman, an economist (in an article posted at creditcollectionsworld.com) blames the investors who flooded the markets in the past decades with tempting equity mortgage deals. More and more homeowners abandon their homes with ridiculously low prices.

In January of this year, foreclosure proceedings jump to 57% compared to last year. Across the country, 233, 001 homes have already received a notice for overdue payments compared to 148, 425 last year.

But the future for equity mortgage is not bleak. Even though the industry is suffering, statistics have shown that consumer demand for equity has actually risen. It shows that the market rose to 5% from last year and the number of policies increased by 5.5%. Dean Mirfin, a business development director, says that the demand for equity remains largely unaffected by the slump in the real estate industry. He says that the media has actually been spreading unnecessary news of gloom in terms of real estate that the equity mortgage side might get affected by this. He assures people that it’s not true.

Alvin James, a San Francisco resident and senior citizen says he has profited much from investing in the 1970’s in his home, improving it gradually. He says it now pays for half his medical bills and even took a cruise to the Bahamas last year. Thanks largely to the Baby Boomers generation which are now reaping the benefits of their investment, so home equity mortgage is till going strong.

A large number of senior citizens above 62years old like James can still rely on their equity mortgage. The government is doing there part in protecting this aspect of real estate industry and although the slump is a reality, we can still expect to see bright things from equity mortgages in the future. Financial advisers and economists say that if it is still possible to hang on to your home, do so because in a few years, they are predicting another boom that will make your houses increase twice or thrice-fold in prices. Belt tightening, as well as saving on daily commodities can also help. In a few years or so, homeowners can take advantage again of a renewed surge in equity mortgages.

Everything You Need to Know About Refinancing Mortgages

$100 bills To refinance a mortgage means to pay off an existing loan by replacing it with another loan. Refinancing may be a wise financial move if it will reduce your mortgage payment, shorten the term of your loan or help you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control.

Refinancing mortgages is common for homeowners in the United States. People usually refinance for a number of reasons; to obtain a new loan with interest rates, to shorten mortgage term, to convert an adjustable rate mortgage (ARM) to a fixed rate one or to convert a fixed rate mortgage to an adjustable, to use a home’s equity to finance another purchase, or to consolidate a debt.

Two factors are involved in refinancing mortgages: money and time. Generally, the more money you can pay upfront, the lesser you need to pay in the long term. Similarly, the more money you need now or the lesser money you can pay upfront, the more you need to pay in the long run.

A, B, C - alphabetLearning the Vocabulary of Mortgage Refinancing

“Points”

Refinancing lenders usually require a certain percentage of the total loan amount as an upfront payment for the processing of mortgage refinancing. This amount is usually expressed in “points” or “premiums.” Each “point” is equivalent to 1% of the total loan amount, so if you choose a plan that requires paying three points, then you will need to pay 3% of the total loan amount upfront. Refinancing lenders usually offer various combinations of points and interest rates that may suit a borrower’s needs. If you pay more “points” upfront, you would usually be allowed to acquire lower interest rates. “Negative points” (or discounts) means that the lender finances part of the loan.

“Cash-out” refinancing

After paying mortgage for a while and if your property appreciated in value, you should have built up some equity in your home. You can access this equity as money through a cash-out refinancing. Say for example your house is worth $200,000 and you still have an outstanding loan balance of $100,000 on your mortgage. You can refinance your mortgage for $150,000 and take the $50,000 as cash from the equity in your home.

“No-cost” Refinance

A “no-cost” refinance is a loan in which you do not have to pay for the refinancing cost upfront and the cost of refinancing is recovered by your lender by adding to your interest rate. The cost of the refinancing transaction would just be built into the interest rate.

“Break-even point”

If you choose to refinance to a lower interest rate mortgage, you will end up saving money each month by lowering your monthly payment– that is if the other loan terms do not change. Since it also costs money to refinance, it is important to determine the break-even point by taking your total transaction costs and divide by your monthly savings. For example, if you save $100 a month by refinancing and the closing costs to refinance is $3,000, you divide the $3000 by 100 and your break-even would be 30 months or two and a half years from the time you refinance.

mortgages and refinancingWhen and why do we need to refinance mortgages?

To secure lower interest rates on existing loans.

If you can reduce your interest rate by at least 2%, by rule of thumb, it is usually worth it to refinance. Some lenders even say that a 1% decrease is worth refinancing.

Reducing the interest rate will save you more money in the long run and will increase the rate at which you build equity and decrease the amount of your monthly payment. For example, a loan of $100,000 with an interest rate of 9% on a 30-year fixed-rate mortgage will cost you principal and interest payment of $804.62. The very same loan, if refinanced at a lower rate of 6% interest will decrease your payment to $599.55.

To shorten the Loan’s Term

Sometimes, it is also worth it to refinance even if the monthly payment barely changes as long as the term of payment shortens. For example the 30-year fixed-rate for the $100,000 loan on a 9% interest rate, if refinanced to a 5.5% interest will cut the term in half and only increase the monthly payment by a bit more that $10.

To convert from Adjustable-Rate to Fixed-Rate Mortgages or Vice Versa

Usually, adjustable rate mortgages offer lower rates than fixed rate mortgages although there are situations when the fixed-rate mortgage ends up being a better deal. In these cases it is better to refinance to a fixed-rate with a lower interest rate at the same time, securing yourself from any interest rate hikes in the future.

Sometimes, the better strategy is to convert from a fixed-rate interest loan to an adjustable rate mortgage especially if rates continue to fall. It is good to observe the trends and go for a conversion especially if you, as a home owner, do not plan to stay long in your home. This way, you would not have to always refinance each time there is a drop in the interest rates. Also, if you only stay in the home for a few years, it is less likely for you to suffer an interest rate hike. This will surely lessen the interest rates and the monthly payments.

To Tap Equity and to Consolidate Debt

To refinance for the purpose of tapping home equity and consolidating debt, it is important to really consider all the factors to avoid falling in the trap of never-ending debt.

Tapping Home equity for a “cash-out” refinancing is when you refinance for a particular amount higher than one’s current principal balance giving you extra cash for immediate needs. Usually home equity is accessed to cover huge expenses like paying children’s tuition fees or remodeling homes. Some say that home remodeling actually adds value to the home although the rates can still be tricky and the plan needs to be carefully reconsidered.

To consolidate a debt, especially by replacing a high-interest rate with one with a lower interest rate is pretty sound. However, this is ideal for those who can maintain financial prudence and avoid the temptation of maxing out on credit limits. Studies show that a rather large percentage of people who once generated high-interest debt on purchases and credit cards usually fall in the same cycle especially if mortgage refinancing gives them the available credit. If this happens, it is really more of a loss to keep on paying application fees to refinance, adding years to the term, or worse, losing equity in the house.

An added bonus for refinancing is to get rid of PMI. Usually homeowners who were unable to give a 20 percent down payment when they purchased their homes may have been required to purchase Private Mortgage Insurance (PMI). If the homes have appreciated since the time of purchase, as mortgage is paid consistently, the homeowners’ equity may actually be more than 20 percent by the time they refinance. For this reason, they wouldn’t need to purchase a PMI.

AttentionRisks

It is important to study closely the pros and cons of mortgage refinancing to make sure you get the best out of it.

Refinancing may cost 3% to 6% of your loan’s principal and it requires application fees, appraisal and such. Sometimes, the total of these fees outweigh the total savings generated through refinancing the loan.

Moreover, take note that many fixed-term rate debts have penalty clauses called “call provisions” which may be triggered by an early payment of the loan or at least a specified portion of it.

Also some mortgage refinancing loans may have lower initial payments but may actually result in larger total interest costs over the entire lifespan of the loan. Make sure to calculate the up-front, the ongoing, and even the potentially variable costs of mortgage refinancing to make sure you cover all risks.

Bingo - light bulbHere are some valuable tips when considering mortgage refinancing:

  1. Ask yourself, “How much money will I actually save?” Make sure that the efforts and the application fees would be worth the extra money you will save. Again, refinancing will surely cost you three to six percent of your loan’s principal.
  2. Ask yourself this also: “How long do I plan to live in the house?” Remember, if you save up a few dollars on your monthly payment and yet, not stay in the house long enough, the cost of refinancing will actually work against your plan of saving in the long run.
  3. Think realistically and practically considering your finances closely. Look into what you can and can’t afford to make sure you are not just entangling yourself into more debt.
  4. Learn the law. There are federal protections instituted to avoid lenders from exploiting borrowers. To know what’s legal or not will help you sort through the unscrupulous lenders from the good ones.
  5. Don’t settle with a lender immediately. Look around and ask around. Make sure to ask knowledgeable people and if possible, ask for quotes from various lenders. By comparing the deals, you can decide on the best lender.

Compute. Some deals may sound and good at face value but actually may not be beneficial in the long run and conversely, some deals seem to offer trivial discounts but may actually give better results on a long term basis. Make sure to compute how much you will benefit in five, ten or even twenty years.