Mortgage Rates Rise Again, Yet Refis Linger and 50 year Mortgage at California
Mortgage rates rise again, yet refis linger
Sometimes you can save money by refinancing your primary mortgage at a higher rate. There is evidence that borrowers are doing just that.
Meanwhile, long-term mortgage rates didn't move much this week. The benchmark 30-year fixed-rate mortgage rose 3 basis points to 6.67 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 5.81 percent; four weeks ago, it was 6.51 percent.
It was the sixth consecutive week that the 30-year fixed rate increased. The last time the rate was this high was in June 2002.
The 15-year fixed-rate mortgage rose 2 basis points to 6.29 percent. The 5/1 adjustable-rate mortgage rose 1 basis point to 6.32 percent.
Refis remain, but reasons change
This week was out of character. For the last few months, short-term mortgage rates have risen faster than long-term rates. That has encouraged a wave of cash-out refinancing -- a refinance in which the new loan balance is bigger than the old loan balance. In the first three months of 2006, according to Freddie Mac, 88 percent of refi borrowers ended up with a higher balance, and more than half ended up with a higher rate as well.
"Almost no one is refinancing to reduce their interest rate in today's environment," Freddie Mac Chief Economist Frank Nothaft says.
Those borrowers aren't crazy; they're doing some math and discovering that they can lower their total monthly debt payments by using cash-out refinances to pay down the balances on their higher-rate credit cards and home equity lines of credit.
"You have to get out a pad and a pen a lot of times," says Bob Moulton, president of American Mortgage, a brokerage that does business in New York and neighboring states, plus Florida. "You write down what you are paying on your mortgage, your Visa, your MasterCard, your home equity line of credit every month. Then you calculate your monthly costs, if you did a cash-out refi, and the numbers speak for themselves."
Here's the kind of calculation you do. Let's say you got a 3/1 ARM a couple of years ago, borrowing $300,000 at 5.5 percent. You opened an equity credit line a year and a half ago at 4.5 percent, and immediately borrowed $30,000 against it for a minimum monthly payment of $112.50. Back then, the total monthly payments for the two loans was $1,815.87.
Next week, the credit line will sport a rate of 8 percent, raising the minimum monthly payment to $200 and the total monthly mortgage payments to $1,903.37.
ARMs resetting, too
And the adjustable-rate primary mortgage will reset next year, probably raising the rate north of 7 percent. Not only that, but the lifetime cap on the ARM's rate is around 11 percent, so your monthly payments conceivably could go much higher in a few years.
If you plan to remain in the house for a few more years, it suddenly looks like a smart move to replace the ARM with a higher-rate, fixed-rate mortgage. "I call that insurance," Moulton says.
You could replace the ARM with a $300,000 fixed-rate mortgage and not touch the balance on the credit line. At a new primary mortgage rate of 6.5 percent, that raises your total minimum monthly payments to $2,096.20. You're bumping your monthly payments up by almost $200, but that beats the payment shock you would suffer next year if you kept the ARM.
The total monthly payment is a bit cheaper than that if you do a cash-out refi to pay off the credit line's balance. In that case, a $330,000 loan at a fixed rate of 6.5 percent gives you a monthly payment of $2,085.82. Better yet, you're now paying off the principal from that line of credit instead of paying only the interest on that debt.
Everyone's situation is different, and, as Moulton says, you have to take pen (or pencil) to paper and calculate your total monthly payments under various scenarios. You can figure out the pretax implications by using Bankrate.com's calculators, including the mortgage payment calculator.
50-year mortgage debuts in California
The Methuselah of mortgages has arrived: the 50-year home loan.
Think of it as a mortgage that has been supersized. Like that other supersizer, McDonald's, the massive mortgage was born in Southern California's San Bernardino County. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and "quite a few applications," says Alex Diaz Jr., vice president of Statewide.
Half of first-time home buyers are 32 or older, according to the National Association of Realtors. If those buyers get 50-year mortgages and never refinance or make extra payments, they won't pay off their loans until they're well into their 80s. Would they be crazy to get loans that amortize or pay off the balance over 50 years instead of the standard 30 years? Not at all, Diaz says.
Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage, he says.
With an interest-only mortgage, the minimum monthly payment doesn't put any money toward principal. A payment-option ARM goes a step beyond that: In some circumstances, the minimum monthly payment doesn't even cover the interest accrued that month. You make a minimum payment at the beginning of the month, and four weeks later, you owe more than you owed before the payment. This condition is called negative amortization, or "going negative."
Forgive borrowers for thinking that it makes better sense to amortize a loan over 50 years than to get an option ARM or interest-only mortgage.
"Payment-option ARMs and interest-onlies have been so popular, we wanted to come out with a longer-term, fully amortizing loan for people who don't want to go negative," Diaz says.
Regulators and consumers worry that foreclosures will surge in coming years, especially among homeowners who got interest-only and payment-option ARMs. The 50-year loan is a lifeline for them, Diaz says.
"There are two markets for this, " he says. "One is if they're looking to purchase a home, because of how expensive housing is, they'll consider this loan. And the other is payment-option ARMs -- borrowers are making minimum payments and they're starting to panic a little bit and look for vehicles to get out of these loans."
About a quarter of new mortgages in California are 40-year loans. This is the next logical step, Diaz believes.
Statewide's 50-year loan is a 5/1 hybrid, meaning that the introductory interest rate lasts five years and then the rate is adjusted annually, moving up and down with the London Interbank Offered Rate, or LIBOR.
Bystanders are dubious of the half-century loan's benefits.
"If you run the amortization out, it basically is an interest-only loan, in all practical terms," says Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group in Woodstock, Ga. "If a person is considering something like that, they're probably trying to squeeze into too much house to begin with."
But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.
Is a 50-year mortgage really an alternative to an interest-only loan? Yes, but it's not necessarily the best option.
"You're not talking about a significant savings in any event," says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Sewall's Point, Fla.
A 50-year loan has lower monthly payments, but the total cost is astronomically higher than that of a 30-year mortgage because you're stretching out the payments for two decades longer. It's impossible to guess how much higher because the rate moves up and down annually for the last 45 years of the loan.
But just for grins, let's compare a 30-year fixed-rate loan with a mythical 50-year fixed. For a 30-year loan of $300,000 at 6.5 percent, principal and interest cost $1,896.20 per month. A 50-year loan for the same amount and at the same rate costs $1,691.15 per month in principal and interest.
The 50-year loan costs $205 less per month, but the payments stretch out for 20 years longer and will cost a total of $332,058 more.
An interest-only loan at 6.5 percent would cost $1,625 per month for the first 10 or 15 years, and then the payment would jump.
Sahnger points out that few people live in one house for 30 years and hardly anyone for 50 years. A lot of home buyers move into a house knowing that they will move out within five years. Most of those people are well-suited for lower-rate hybrid adjustable mortgages, Sahnger says.
As for the 50-year mortgage, it's a good attention-getter, Sahnger says: "People are trying to differentiate themselves in the marketplace."
Sometimes you can save money by refinancing your primary mortgage at a higher rate. There is evidence that borrowers are doing just that.
Meanwhile, long-term mortgage rates didn't move much this week. The benchmark 30-year fixed-rate mortgage rose 3 basis points to 6.67 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 5.81 percent; four weeks ago, it was 6.51 percent.
It was the sixth consecutive week that the 30-year fixed rate increased. The last time the rate was this high was in June 2002.
The 15-year fixed-rate mortgage rose 2 basis points to 6.29 percent. The 5/1 adjustable-rate mortgage rose 1 basis point to 6.32 percent.
Refis remain, but reasons change
This week was out of character. For the last few months, short-term mortgage rates have risen faster than long-term rates. That has encouraged a wave of cash-out refinancing -- a refinance in which the new loan balance is bigger than the old loan balance. In the first three months of 2006, according to Freddie Mac, 88 percent of refi borrowers ended up with a higher balance, and more than half ended up with a higher rate as well.
"Almost no one is refinancing to reduce their interest rate in today's environment," Freddie Mac Chief Economist Frank Nothaft says.
Those borrowers aren't crazy; they're doing some math and discovering that they can lower their total monthly debt payments by using cash-out refinances to pay down the balances on their higher-rate credit cards and home equity lines of credit.
"You have to get out a pad and a pen a lot of times," says Bob Moulton, president of American Mortgage, a brokerage that does business in New York and neighboring states, plus Florida. "You write down what you are paying on your mortgage, your Visa, your MasterCard, your home equity line of credit every month. Then you calculate your monthly costs, if you did a cash-out refi, and the numbers speak for themselves."
Here's the kind of calculation you do. Let's say you got a 3/1 ARM a couple of years ago, borrowing $300,000 at 5.5 percent. You opened an equity credit line a year and a half ago at 4.5 percent, and immediately borrowed $30,000 against it for a minimum monthly payment of $112.50. Back then, the total monthly payments for the two loans was $1,815.87.
Next week, the credit line will sport a rate of 8 percent, raising the minimum monthly payment to $200 and the total monthly mortgage payments to $1,903.37.
ARMs resetting, too
And the adjustable-rate primary mortgage will reset next year, probably raising the rate north of 7 percent. Not only that, but the lifetime cap on the ARM's rate is around 11 percent, so your monthly payments conceivably could go much higher in a few years.
If you plan to remain in the house for a few more years, it suddenly looks like a smart move to replace the ARM with a higher-rate, fixed-rate mortgage. "I call that insurance," Moulton says.
You could replace the ARM with a $300,000 fixed-rate mortgage and not touch the balance on the credit line. At a new primary mortgage rate of 6.5 percent, that raises your total minimum monthly payments to $2,096.20. You're bumping your monthly payments up by almost $200, but that beats the payment shock you would suffer next year if you kept the ARM.
The total monthly payment is a bit cheaper than that if you do a cash-out refi to pay off the credit line's balance. In that case, a $330,000 loan at a fixed rate of 6.5 percent gives you a monthly payment of $2,085.82. Better yet, you're now paying off the principal from that line of credit instead of paying only the interest on that debt.
Everyone's situation is different, and, as Moulton says, you have to take pen (or pencil) to paper and calculate your total monthly payments under various scenarios. You can figure out the pretax implications by using Bankrate.com's calculators, including the mortgage payment calculator.
50-year mortgage debuts in California
The Methuselah of mortgages has arrived: the 50-year home loan.
Think of it as a mortgage that has been supersized. Like that other supersizer, McDonald's, the massive mortgage was born in Southern California's San Bernardino County. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and "quite a few applications," says Alex Diaz Jr., vice president of Statewide.
Half of first-time home buyers are 32 or older, according to the National Association of Realtors. If those buyers get 50-year mortgages and never refinance or make extra payments, they won't pay off their loans until they're well into their 80s. Would they be crazy to get loans that amortize or pay off the balance over 50 years instead of the standard 30 years? Not at all, Diaz says.
Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage, he says.
With an interest-only mortgage, the minimum monthly payment doesn't put any money toward principal. A payment-option ARM goes a step beyond that: In some circumstances, the minimum monthly payment doesn't even cover the interest accrued that month. You make a minimum payment at the beginning of the month, and four weeks later, you owe more than you owed before the payment. This condition is called negative amortization, or "going negative."
Forgive borrowers for thinking that it makes better sense to amortize a loan over 50 years than to get an option ARM or interest-only mortgage.
"Payment-option ARMs and interest-onlies have been so popular, we wanted to come out with a longer-term, fully amortizing loan for people who don't want to go negative," Diaz says.
Regulators and consumers worry that foreclosures will surge in coming years, especially among homeowners who got interest-only and payment-option ARMs. The 50-year loan is a lifeline for them, Diaz says.
"There are two markets for this, " he says. "One is if they're looking to purchase a home, because of how expensive housing is, they'll consider this loan. And the other is payment-option ARMs -- borrowers are making minimum payments and they're starting to panic a little bit and look for vehicles to get out of these loans."
About a quarter of new mortgages in California are 40-year loans. This is the next logical step, Diaz believes.
Statewide's 50-year loan is a 5/1 hybrid, meaning that the introductory interest rate lasts five years and then the rate is adjusted annually, moving up and down with the London Interbank Offered Rate, or LIBOR.
Bystanders are dubious of the half-century loan's benefits.
"If you run the amortization out, it basically is an interest-only loan, in all practical terms," says Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group in Woodstock, Ga. "If a person is considering something like that, they're probably trying to squeeze into too much house to begin with."
But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.
Is a 50-year mortgage really an alternative to an interest-only loan? Yes, but it's not necessarily the best option.
"You're not talking about a significant savings in any event," says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Sewall's Point, Fla.
A 50-year loan has lower monthly payments, but the total cost is astronomically higher than that of a 30-year mortgage because you're stretching out the payments for two decades longer. It's impossible to guess how much higher because the rate moves up and down annually for the last 45 years of the loan.
But just for grins, let's compare a 30-year fixed-rate loan with a mythical 50-year fixed. For a 30-year loan of $300,000 at 6.5 percent, principal and interest cost $1,896.20 per month. A 50-year loan for the same amount and at the same rate costs $1,691.15 per month in principal and interest.
The 50-year loan costs $205 less per month, but the payments stretch out for 20 years longer and will cost a total of $332,058 more.
An interest-only loan at 6.5 percent would cost $1,625 per month for the first 10 or 15 years, and then the payment would jump.
Sahnger points out that few people live in one house for 30 years and hardly anyone for 50 years. A lot of home buyers move into a house knowing that they will move out within five years. Most of those people are well-suited for lower-rate hybrid adjustable mortgages, Sahnger says.
As for the 50-year mortgage, it's a good attention-getter, Sahnger says: "People are trying to differentiate themselves in the marketplace."
from source : Bankrate (by Holden Lewis)
posted by !GOD BLESS YOU! at 09:22
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