Mortgage Rate Drops Below 4%

Last week, Freddie Mac reported an interest rate on a 30-year, fixed rate mortgage of 3.97%, representing the lowest level since June 20, 2013. This results from a number of factors. Interest rates typically move alongside the 10-year Treasury note, which reached a low of 1.86% last week. This is the first time that the yield has been below 2% since May 2013. Many investors prefer the safety of U.S. Treasury bonds given concerns about the economic weakness in Europe, Ebola, and geopolitical turmoil worldwide (such as the threat of the Islamic State militia group in the Middle East). This contrasts expectations of rising interest rates resulting from the Federal Reserve pulling back its economic stimulus of buying bonds and mortgage-backed securities.

Many homeowners have seized this opportunity to refinance. Bank of America reports that a .5% decrease in mortgage rates for a home worth $221,000 should result in savings of $50 per month. However, the Associated Press argues that mortgage rates should not solely dictate the decision to refinance, because doing so is costly. For example, it would cost approximately $2,500 in fees to refinance from a 5.5% to 4% mortgage rate on a $200,000 mortgage, taking roughly 14 months to break even.

Refinancing 101

Refinancing is the process of replacing your original mortgage with a new mortgage that has a more favorable interest rate and term. Many people choose to refinance when they have home equity (the difference between the amount owed to the mortgage company and the home's value). In other words, refinancing is paying off an existing loan with the proceeds from a new loan. Refinancing lenders typically require a percentage of the total loan amount, in the form of "points," as an upfront payment. One point equals 1 percent of the total loan amount. The more points, the better, because a larger payment upfront results in a lower interest rate.

Pros
Refinancing can reduce monthly payments and interest rates, and allow people to choose a different mortgage company or take cash out of their home preceding a large purchase. Homeowners can also cancel their private mortgage insurance (PMI) with a mortgage refinance loan, as the home's value increases and the balance on the home declines. Some people refinance to switch between an adjustable rate mortgage and a fixed one. For those with balloon programs such as ARMs, refinancing allows someone to switch to a new, fixed rate before the entire mortgage balance is due at the end of the term (usually five to seven years). One other reason for refinancing is to consolidate other debts into one loan.

Cons
However, there are risks involved. People may incur penalties that can amount to $1000+ for paying down their existing mortgage with home equity credit. Make sure you have an understanding of the fees involved before committing to refinancing. Fees can account for 3-6 percent of your outstanding principal and include the application fee, title insurance and title search, the lender's attorney review fees, homeowner's insurance, the appraisal fee, and points and fees incurred in loan origination. Your savings in interest must exceed refinancing fees in order for refinancing to be worthwhile.

Interested in refinancing? Experiment with the home refinance calculator. To learn more about refinancing a home, watch the short video below:

Mortgage Demand Dropping - Find Out Why

Fixed-rate mortgages continue to decline rather than increase, which was expected of the second half of 2014. Last week, they reached the lowest average of the year, as reported by Freddie Mac. For the week ending August 21, the average 30-year fixed-rate mortgage was 4.10 percent (down from 4.58 this time last year and 4.12 percent last week), while the average 15-year fixed-rate mortgage was 3.26 percent (down from 3.60 percent this time last year and 3.24 percent last week). Freddie Mac predicts new and refinance mortgage origination volume this year to be the lowest since 2000, at approximately $1.15 trillion.

 So why has mortgage origination declined? Freddie Mac analysts identify three reasons:

1. The refinancing boom is over. The number of home refinances has fallen 60% from 2013 to 2014 and is expected to decrease another 50 percent from 2014 to 2015. Mortgage rates are expected to rise soon, discouraging borrowers from refinancing.
2. Home sales are low. Compared to the first half of 2013, home sales have fallen roughly 5 percent in the first six months of this year. Reasons include slower economic growth, a phase of higher mortgage rates, a harsh winter, minimum new home construction, and limited inventory.
3. More buyers are using cash. Although the number of buyers paying in cash is expected to decrease alongside the number of distressed homes on the market, all-cash home sales rose from 31 to 33 percent in the first six months of 2014.

Whatever the reason, now is the time to take advantage of lower borrowing costs before they inevitably rise!

MHA Program for Distressed Homeowners Extended

The Making Home Affordable (MHA) program was introduced by the U.S. Department of the Treasury in April 2009 and has recently been extended through December 31, 2016. Broadly, the program aids homeowners who struggle to pay their mortgage payments and who lack the equity to refinance. The MHA program includes the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), among other options.

HARP allows homeowners with loans guaranteed or owned by Fannie Mae and Freddie Mac who are underwater on their loans to refinance into mortgages with lower interest rates. Through HARP, over 3.1 million homeowners have refinanced their loans. Nearly a quarter of all refinances were part of the HARP program in the first quarter of 2014.

HAMP is designed to aid homeowners who can no longer afford their home loan payments and took out a loan before January 1, 2009 that is owned, insured, or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Upon showing evidence of financial hardship and on-time loan payments during a trial period, HAMP has enabled over 1.3 million homeowners to permanently modify their mortgage loans. Homeowners save roughly a third of their monthly mortgage payments, or $544.

Both HARP and HAMP work to reduce the number of foreclosures, which fell to the lowest level since 2005 in May 2014. Recently, military resources for military homeowners and families who are permanently displaced by a job-related move have been incorporated into the MHA program.

Mortgage Rates Rise

Fox Business reports that, as of June 17th 2013, mortgage rates had risen for six straight weeks. In early May, the fixed rate was 3.52%. The benchmark 30-year fixed-rate mortgage further increased from 4.1% to 4.14% within the past week (Bankrate.com). Until the first week of June, the fixed rate had been below 4% since May 2012, an entire year earlier. Mortgage rates are no longer near record lows, as markets react to the supposition that the Fed may soon reduce its $85-billion-per-month bond-buying program. This program has helped keep rates low; however, once the Fed determines that the economy has recovered well enough to support itself, the program may be reduced or abolished altogether. 

While it's unlikely rates will return to their recent lows, they may stabilize. John Stearns, a mortgage banker for American Fidelity Mortgage Services in Mequon, Wisconsin, claims that 4% for a 30-year fixed is going to become standard.

The recent increase in mortgage rates has caused some people to urgently refinance their homes, as they are concerned rates will continue to increase. Jim Sahnger, a mortgage loan originator for FBC Mortgage in Jupiter, Florida, points out that mortgage rates are constantly changing, and that what someone can get today may not be available tomorrow. 

There are different ways to interpret this news. While the latest rates are nearly half a percentage point more than rates were this time last year, they are still much lower than the 6-7% people with older loans may still be paying. 

Read the full article here.