Just when you thought that mortgage interest rates were as low as they could go, they drop even lower making those in the industry wonder just when we will actually see the bottom. According to the weekly mortgage survey conducted by Freddie Mac , interest rates on 30 year fixed-rate mortgages averaged 4.85% the week of March 26th. This is down from last weeks average of of 4.98%. Rates for 15 year mortgages were averaging 4.58%.
Many critics say that even this drop is not enough to stimulate sales of new homes in the current economy. Tighter credit restrictions and buyer insecurity mean that even at the current low rates, home sales are unlikely to improve. Could we see mortgage interest rates as low as 3% in the next year? It has already happened for some IndyMac borrowers after the FDIC took control of the failing bank. Indeed, the Fed has been actively encouraging banks to lower rates for distressed borrowers in an effort to stem the rising tide of US foreclosures. Whether lowering the rates will have any effect on those borrowers already verging on foreclosure remains to be seen, but there is no doubt that low interest rates will encourage refinancing and stimulate home sales. All of which is great for customers and the economy but not so great for banks unless the rate changes signicantly prevent additional foreclosures.
Countrywide Financial (CFC), the now infamous home mortgage division of Bank of America and at one time the largest lender of home loans in America, may launch the most aggressive plan yet to stem the tide of home mortgage foreclosures. The mortgage modification plan is the result of a multi-state lawsuit that charges that Countrywide duped first time mortgage buyers into taking on loans that were beyond their means.
The details of the plan call for a reduction of interest rates aimed at borrowers of sub prime and adjustable rate mortgages (ARM’s). Interest rates could be cut to as low as 2.5% for some borrowers, although the cuts would be temporary. The idea is to decrease mortgage payments so that the total payment does not exceed 34% of a borrowers income, which is the approximate percentage that reputable lenders use to determine a persons eligibility for a home loan. Had Countrywide and other sleazy lenders used this formula to begin with, the mortgage crisis would have never happened.
In addition to cutting interest rates for distressed home buyers, Countrywide will freeze foreclosures until borrowers mortgages can be evaluated and readjusted. All legal proceedings against Countrywide will be suspended until March 1, 2009 provided they meet the goal of adjusting 50,000 mortgages. The final objective is to reduce 395,000 loans in states hardest hit by the sub prime crisis including California, Illinois, and Florida.
This will be the most aggressive and possibly the most effective plan to address the mortgage crisis to date. Key lawmakers are putting the pressure on other lenders to adopt the program since recent efforts by the Bush administration have done little but reward the irresponsible behavior that created the problems in the first place.
Buying a new home is a big step and for some is the largest investment they have ever made. Most people can not afford to buy a home outright, so they get a loan instead. This loan is called a mortgage and there are two main kinds.
With a fixed rate mortgage you are guaranteed by the lender to maintain the same interest rate during the entire length of your loan. The major advantage to this type of loan is that if the federal interest rates go up, you are locked in at a lower rate that can not be changed by the bank. There is a flip side to this though, because if the federal interest rate goes down, your interest rate will not.
Most people that finance their home with a fixed rate mortgage, do so over the course of 30 years. The advantage to this is that you get a larger tax advantage and because it is spread out over 30 years a lower monthly payment.
Others opt for a shorter mortgage of 15 or 20 years. Generally the shorter the loan, the lower the interest rate. This means you pay less interest, but because you are paying over a shorter time the monthly payments will be higher.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage, as the name implies, is a mortgage that does not have a fixed interest rate. The interest rate is set to be re-evaluated at a predetermined period. The interest rate can go up or down and a cap is placed on the percent it can change each time.
The frequency that the interest rate adjusts is set by the bank, as is the amount the interest rate can change each time. For example say you are offered a 4.9% 3/1 ARM. This means that the first 3 years, the interest rate will stay at 4.9%. After that your interest rate will adjust every 1 year. The percent that the interest rate can go up or down is set at the time of the loan, but it is often 1%. So in 4 years when the interest rate change, you would probably be paying 5.9%. The next year it would be re-evaluated and would either raise or lower 1%.
The advantage to this type of loan is that your initial interest rate will be generally less expensive than a fixed rate mortgage. If you keep the loan without refinancing though, you will likely end up with a much higher interest rate because except in times of recession, your interest rate will not typically go down. An adjustable rate mortgage is perfect if you intend to refinance or sell your home within a few years before the interest rate changes.
March 29 (Bloomberg) — President Bush announced plans yesterday to increase government assistance to distressed homeowners in an effort to curb the current crisis in the mortgage industry. This is no doubt in response to pressure from leading Democrats who have been vocal in their criticism toward the administrations “wait and see” approach.
Although no firm details have been announced, the primary target of the Bush plan will be to tackle the problem of “underwater” loans or loans that are larger than the actual value of the property. This will mean that cooperation with lenders will be essential as any strategy will require the lenders to forgive part of the loan and refinance the remaining principle with backing from the government. The plan will likely require that homeowners remain in their homes, are able to afford the new payments, and that their lender is willing to sign off on the changes.
Thornburg mortgage is just the latest wall street lender on the brink of collapse as mortgage backed securities continue to lose all value. As of Wednesday morning, Thornburg stock had dropped 49% to only $1.50 a share after the company announced that it needed to raise at least $948 million dollars to stay afloat. The plan entails using convertible bonds that will give investors a 27% share in the company, further diluting the already worthless shares for the current share holders. The deal has yet to materialize as investors may be wary after the recent Bear Sterns debacle. Originally scheduled for a Thursday release, the convertible bonds have been pushed back till Monday as Thornburg works to attract potential investors.
Experts say that Thornburg mortgages are not defaulting in large numbers but the current credit crisis has lessened their value as an asset and in turn, Thornburg’s overall equity.
According to the Mortgage Bankers Association of America, Americans refinance their home mortgage loans every four years. But how do Americans know it is time to refinance? How do they know which refinance loan to choose?