Is the 30-Year Fixed Mortgage Actually a Lot of Work?

I typically refer to the 30-year fixed mortgage as a set-it-and-forget-it type of mortgage because it’s fixed for the entire duration of the loan.

The mortgage rate in month one is the same as the rate in month 360. The mortgage payment never changes, though the total housing payment could vary thanks to things like taxes, insurance, and PMI.

Put simply, it’s a very easy mortgage to wrap your head around, and for that reason the most popular and common choice for homeowners here in the United States.

The same isn’t true elsewhere in the world, which is one of the reasons why the 30-year fixed has been questioned a lot lately by economists and mortgage pundits.


The latest opinion comes from Benjamin Keys of The Wharton School of the University of Pennsylvania, who analyzed how monetary policy makes its way into households via the mortgages borrowers hold.

During the most recent crisis, those with adjustable-rate mortgages actually “won” in a sense because their rates adjusted lower when the government stepped in and bought tons of mortgage-backed securities while lowering other borrowing rates.

Meanwhile, those with fixed rates didn’t benefit at all, and in fact were trapped in their mortgages because of equity issues, namely underwater mortgages.

This meant those who ostensibly took on more risk were rewarded when the wheels fell off. And those who were seemingly prudent in their mortgage choice were punished because they were unable to refinance until HARP came along.

Does that mean we should all go with ARMs instead of fixed-rate loans and hope the government takes care of the rest?

Is an ARM the Hands-Off Mortgage Solution?

Keys noted that there is an “automatic transmission of monetary policy through adjustable-rate mortgage contracts.”

In other words, the ARM adjusts with the greater economy and the borrower doesn’t have to go out and refinance or lift a finger.

Their lender will just adjust their payment as the index changes, whether it’s up or down. Of course, lately it’s been a one-sided argument, with ARMs generally falling at the reset, instead of climbing.

This has actually led to debt reduction and new spending, with borrowers who selected ARMs choosing to pay down higher-APR like credit cards while also purchasing new cars.

Effectively, the economy was stimulated via these ARMs because it freed up cash for households to inject back into the economy through other channels.

Mortgage defaults in this group also dropped by some 36% thanks to the reduced monthly payment.

To summarize, borrowers with ARMs didn’t need to do anything to obtain lower payments, despite the fact that most probably assumed they’d have to refinance out of the ARM once it adjusted (higher).

At the same time, their neighbors with fixed-rate mortgages set at 6% were probably shaking their heads, wondering how they wound up paying more.

Additionally, they had to keep a close eye on interest rates to ensure they weren’t paying too much, and then make the decision to refinance or not. That meant a lot of work (and worrying), ironically.

Interestingly, Wharton researchers found that regions of the country that had more ARMs recovered faster during the Great Recession, saw more auto sales, and increased local employment.

Could the Opposite Happen?

The problem is ARMs can move both up and down, and everyone (including Wharton) expects rates to go up the next time around.

The big question is how things will play out when that happens. Will the borrowers who elected to take out ARMs get burnt and require a bailout?

Will home prices go down more in the areas where ARMs were more popular?

If so, might the 30-year fixed prove to be the winner it was expected to be prior to the most recent housing crisis? And as such, should it be left alone?

All to be determined…but there’s a good takeaway here. Monetary policy can dictate whether ARMs adjust higher or lower, so in that sense the Fed has the ability to provide direct stimulus to homeowners, without tax rebates or mass refinancing programs. That’s a pretty powerful thing.

But if homeowners keep opting for the 30-year fixed, it’ll be difficult for the Fed to do a whole lot, and these homeowners might just find that their mortgages are a lot more work than they expected.

source: thetruthaboutmortgage.com

Raise Your Credit Score with These Tips

When it comes to getting a good deal on a mortgage, your credit score may be even more important to you than you realize.

It’s one of the three most important metrics lenders use to decide whether or not to approve your mortgage application; the higher your score, the more confident they are that you will make your monthly payments on time. Most home buyers don’t know how much their credit scores impact the mortgage rates they will pay.

Let’s play with some numbers.* A $250,000, 30-year fixed mortgage will require monthly payment of principal and interest of $1,527, for a borrower with a 620 score. That’s a total of $299,821 of total interest paid over thirty years.

If you have a better credit score of 700, you are considered a less risky borrower. You can expect to pay $1,313 monthly for a total of $222,689. If you have an extremely favorable credit score of 780, you fall into the top-tier range of borrowers, and lenders will likely offer you a lower mortgage rate along with more loan choices. Your monthly payment will be $1,280 for a total of $210,681.

Here are some tips to help you get your credit under control and turn it into an asset if it is a liability today.

Start now. Credit scores don’t change overnight. If you plan to buy a home a year from now, you need to get to work immediately in order to get your credit in shape by the time you apply.

Do a reality check. Order your credit histories from the three primary credit bureaus: Experian, Equifax and Transunion. Review them for accuracy. You’ll see immediately how detrimental making a payment that is late by only a few days can be to your credit.

If you see errors that you can document, ask for them to he removed. Take note of any really serious marks against you like foreclosure, bankruptcy, tax liens and collections actions. If you have any of these, they will remain on your record for five to seven years and you will have to work extra hard to improve every other aspect of your credit to qualify. Sign up for a service that will notify you of changes in your credit.

Pay your bills on time. If you have missed payments, get current and stay current. Sign up for a “wallet” program through your bank or online service. Pay your bills through your bank so that there is no delay.

With today’s technology, there is no excuse for ever making a late payment to a regular monthly creditor. The longer you pay your bills on time after being late, the more your FICO Scores should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO Scores fades as time passes and as recent good payment patterns show up on your credit report

Reduce your use of credit. Most people use their credit too much. Create a budget and learn to live on a cash basis. Use your credit cards only for purchases you can pay off quickly or for emergencies. Keep balances low on credit cards and other “revolving credit”; high outstanding debt can affect a credit score.

Don’t close unused credit cards as a short-term strategy to raise your scores, but don’t open new credit cards just to increase your available credit. Reducing your balances is important, but taking the next step and closing cards won’t really improve your case; lenders like to see that you have credit available. A closed account remains on your credit report.

Especially, do not close your oldest credit card account. A long history of using and making monthly payments will improve your score. However, this is certainly not the time to open new credit cards. New accounts will lower your average account age, which will have a larger effect on your scores if you don’t have a lot of other credit information. Rapid account buildup can look risky if you are a new credit user.

Keep balances low on credit cards and other “revolving credit”. This is also not the time to make large purchases. Rather reduce your outstanding debt by increasing your monthly payments. If making minimum payments has been your practice, stop now and pay more.

Have credit cards – but manage them responsibly.
In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

Don’t relax until you have closed on your new home. Mortgage lenders often pull the credit history of a customer the day before they close. If there is a significant change in their FICO or a new purchase that raises their debt, they are within their rights to raise the interest rate or cancel the mortgage altogether. Don’t relax until they hand you the keys to your new house.



*These are for demonstration purposes only. Your numbers may differ.

source: totalmortgage.com

How to Save Money on Your Mortgage Even If You Can’t Refinance

One of the simplest ways to save money on your mortgage is by lowering your interest rate.

This is generally accomplished via a rate and term refinance, where the loan amount stays the same, but the interest rate and loan term are changed.

For example, if you’re currently stuck with a 6% interest rate on your 30-year fixed mortgage, refinancing to a rate closer to 4% will save you some dough each month.

Not only will it reduce your monthly payment, making life more affordable, but it will also result in less interest paid throughout the life of the loan.


Sounds like a win-win, but what if you’re unable to refinance for whatever reason?  Ben Bernanke, I’m looking in your direction…


 You Can Still Save Money


While you won’t be able to lower your monthly payment without refinancing, you can still save a ton of money on your mortgage another way.

Simply making extra payments, biweekly payments, rounding up payments, or implementing a variety of other methods, you can reduce the total interest you’ll pay on your mortgage without a refinance.

Sure, a refinance combined with extra monthly payments would save you even more money, but if you don’t have that option, this is the next best thing.

Imagine you took out a $100,000 mortgage five years ago and got a rate of 6% on a 30-year fixed.

You inquire about a refinance but after some shopping around determine you’re ineligible because your credit score isn’t up to snuff.

Instead of simply giving up, you can make larger payments each month and shave years off your mortgage (and pay a lot less interest).

If you paid an extra $100 monthly after making the standard payment for the first five years of the loan, you’d still save more than $26,000 and shorten the term to just over 23 years.

If you paid an extra $200 per month (after five years), you’d save more than $40,000 in interest and turn your 30-year mortgage into a 20-year loan.

The beauty of the non-refinance route is that you also don’t reset the clock on your mortgage. In other words, you don’t extend the term with a fresh loan. In fact, you do the complete opposite.


 But You Need Money…


There’s one huge caveat to this. You need money! Yes, if you actually want to save money on your mortgage without refinancing, you’ll need to make larger payments.

So for those looking to refinance to free up some cash, this method isn’t for you.

But for those who have extra cash lying around, you can get the same interest savings associated with a refinance by paying extra each month or in one lump sum.

Just keep in mind that the extra payments won’t lower future monthly payments. It’ll just reduce your term and total interest expense.

And who knows – if you pay down your mortgage more quickly now, you might be able to refinance in the future more easily because you’ll have a lower loan-to-value ratio.

source:  thetruthaboutmortgage.com

Mortgage Rates on the Rise?

According to data recently released by Zillow, 30 year fixed mortgage rates are currently around 3.73%. After rising to 3.83% over the course of last week, they dropped slightly at the start of this week.

“Rates remained flat for most of last week but jumped sharply after Friday’s exceptionally strong jobs report, before easing back down early this week,” said Erin Lantz, vice president of mortgages at Zillow. “We expect rates to hold steady this week due to little incoming data and the official start of the European Central Bank’s bond purchases.”

Though rates still remain low, many in the industry still expect them to rise later this year, thanks to a slowly improving economy. If you’re considering buying a new home or refinancing, now is the time to do it. To take a look at the rates we can offer, head over to our rates page.

source: totalmortgage.com