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

The Equity Boom Might Be Making You Money

Have you ever checked out your bank account online only to discover you’re $50,000 richer than you were yesterday? That may sound like the sort of thing that happens only in fairy tales and lottery advertisements, but it’s happening right now to millions of homeowners across the nation.

How does it happen?


Homeowner equity is the largest source of wealth for many Americans, and as I speak, an equity boom is underway, raising homes values over the past three years as prices recover from the housing crash.The evidence suggests we’re still in the beginning phases of a boom that is unmatched in modern times. We may not even reach the halfway point for two years or so.

Following the housing crash in 2007, homeowners lost trillions worth of equity in their homes as prices, and then values, plummeted. Falling values pushed millions of homeowners “underwater” or into “negative equity” as their homes became worth less than the amount they owned on their mortgages.  When many homes became virtually worthless, owners defaulted on their loans—sometimes voluntarily. By the end of the Foreclosure Era, more than 5 million homes were lost—about the same number as all the existing homes typically sold in a year.

Is your home still underwater? Many still are. Luckily, the government has programs in place that can help. Learn more about HARP here.

Tracking home value increases


When the recovery began in 2012, the national median home price was at a multi-year low of $154,600 in January of that year. In November 2016, it had reached $220,300 and was still climbing.[1] That’s an increase of 42.2 percent. Sales price trends influence home values over time, so it’s a fair assumption that values are generally following suit and may be increasing much more than 42 percent in hotter Western markets.

Over the past three years, Homes.com has tracked price recovery on a market-by-market basis. By September 2015, 170 of the nation’s largest 300 markets, or 57 percent, had returned to the peak prices they achieved before the housing crash, including 53 of the top 100 markets.^[2]

The real estate data and analytics firm CoreLogic estimates that the number of mortgaged residential properties with equity at the end of the third quarter of 2015 reached approximately 46.3 million, or 92.0 percent of all homes with an outstanding mortgage, a decrease of negative-equity homes by 11.8 percent in 12 months. In Q3 2015 there were 37.5 million borrowers with at least 20 percent equity, up 7 percent from 35 million in Q3 2014.[3] Homeowners with 20 percent or more equity will find in easier to sell their homes, refinance or take out loans where their equity provides the collateral.

Price increases are expected to moderate in 2016, causing CoreLogic to move back is forecast for the date when the national median sales price will reach the peak level attained before the housing crash. Initially the firm predicted the peak would be reached in mid-2016; now it is forecasted for mid-2017.[4] The rate of increase in the CoreLogic Home Price Index is expected to slow to 4 to 5 percent during 2016 from about 6 percent in 2015.[5]

These medians, whether market-by-market in the Homes.com reports or CoreLogic’s national medians, represent only a midpoint among homeowners. Even in a market where the median price has reached the peak price half or more than half of homeowners could still below the peak. It will take several more years of price growth for the Equity Boom to fully reach a significant majority of homeowners.

What does this mean for you?


CoreLogic’s data only covers homeowners with a mortgage. If you are one of the 34.4 percent of homeowners who own their homes free and clear[6], the Equity Boom is putting money in your pocket just as quickly as your neighbor with a mortgage—and you don’t have to pay any of it back to a lender when you sell!

The Equity Boom is not occurring at the same pace by geography or by price tier. In general, the bulk of positive equity for mortgaged residential properties is concentrated at the high end of the housing market. For example, 95 percent of homes valued at $200,000 or more have positive equity compared with 87 percent of homes valued at less than $200,000.[7]

In general, those markets that are trailing in the race to regain peak prices lost the most value during the foreclosure crisis and therefore have the longest roads to travel to regain their peak prices. Those where demand is strong and prices are rising fastest are making the most progress to meet and exceed their peak price levels.

source: totalmortgage.com

Seven Ways to Lower Your DTI

Your debt-to-income (DTI) ratio is one of the three most important factors that lenders look at when deciding whether or not to approve you for a mortgage (the other two? Your FICO score and the loan-to-value ratio, which varies with the price of the house you plan to buy).

DTI is considered especially important in determining your ability to repay the mortgage.

It is computed with your total monthly debt payments and gross monthly income (before taxes are taken out). It is expressed one of two ways, either including your estimated monthly mortgage payments (”back end”) or your debt obligations before you take out the mortgage (“front end”).

In 2014, an important new rule promulgated by the Treasury Department had a major impact on DTIs. Known as the QM Rule and designed to toughen ability-to-repay requirements, it had the effect of limiting DTIs to 43 percent. That means borrowers with DTI’s above 43 won’t get loans.

In practice, lenders are actually even more conservative; the median back-end DTI is about 37 percent for approved mortgages. That means most monthly debt payments including mortgage payments total no more than 37 percent of total monthly gross income.

DTI can be a killer for young adults making sizable student loan payments or for consumers who have run up debt. However, even those with long-term debt payments like student loans, auto loans, or back taxes can get a mortgage if they improve their DTI.

Here are five steps anyone can take to lower their DTI.

1. Pay off your smallest debts first.

Even a hundred dollars on a credit card requires a minimum monthly payment, which will increase your DTI. Pay these off in full. Dollar for dollar, you will get more debt reduction with this tactic than any other.

2. Refinance high APR credit card debts with a low APR card.

APR means annualized percentage rate—the actual interest you pay over a year. It’s a way to look at the interest you are paying without focusing on special introductory rates, which can be misleading. Many lenders offer cards with very attractive APRs to customers who have good credit ratings.

If you have cards that are past their introductory period, though, you may be paying a higher APR than you need to. Contact one of the major credit card lenders to see what they will offer in the way of a lower APR card. When you find one, consolidate your high APR debts under your new low APR card. You will reduce your monthly debt load and pay at a lower rate of interest. In a year, review where you stand. If the marketing rate that made your new card attractive has expired, consider finding a new one and consolidating again.

3. If you thought you outfoxed the dealer and got a great deal on a new or used car, check again.
You might be paying interest at a rate much higher than you need to. The median APR for car loans today is 4.38% for a 60-month loan (five years) on a new car and 5.2% on a 36-month loan a (three years) for a used car. Refinance your car with the most competitive rate you can find from an online lender.

When you refinance, you can increase the length of time of the loan if you have had your car for a reasonable length of time. Lowering the interest and stretching out the principal over a longer period of time could significantly reduce your monthly payments.

4. Refinance long-term debt to lower your monthly debt payments by stretching out the term of your loan and take advantage of lower rates.
If you graduated more than three years ago, chances are good you can find a better interest rate today, depending on your credit rating. Remember, if the interest rate is the same, when you refinance a loan to lengthen its term, you will be paying more in interest over the long term than you would have if you had not refinanced.

5. Borrow from your 401K retirement plan at no interest to pay off smaller debts or pay down larger ones.
As you make future monthly contributions to your plan, a portion will go towards paying off the amount you withdrew. You will also have to pay taxes on your withdrawal. Repay the withdrawal as soon as you can to keep your retirement savings on track.

6. Get Government help.

In an effort to encourage new renters to convert to buyers, several government programs exist to help. Federal Housing Administration (FHA) loans allow borrowers to get into a home with a high debt to income ratio, allowing for a slightly higher mortgage payment amount than the buyer might normally qualify to pay. Veterans may be able to get assistance through a Veterans Administration (VA) loan, which allows the total amount of housing expense plus recurring debt to be as much as 41 percent.

For homeowners interested in refinancing, the government offers help through the Home Affordable Refinance Program (HARP). Before seeking this type of loan, borrowers should gather as much information as possible to help prove they’re working hard to pay down all debts. You’ll also need to have been on time for all of your payments for at least the past year and have credit in good standing. HARP primarily targets homeowners who have a small amount of equity in their existing homes or who currently owe more than their home is worth. Borrowers may have to check with several lenders to find one who offers HARP as a refinancing option.

For those with high debt-to-income ratios, landing a home loan may be challenging, but it’s far from impossible. By lowering debt and working directly with lenders to learn about all the options available, borrowers can get into a home and begin to work on paying off all of those debts to make the next purchase easier.

7. Increase your down payment.
While this may not be a viable option for someone with a high amount of debt, you can boost your chances by putting up a large down payment. The less you have to borrow, the less strict the requirements, increasing your chances of success. A large down payment shows the lender that you’ve invested in the property, as well, reducing the risk that you’ll abandon the property before the mortgage is paid in full.

The bottom line

Take a hard look at your debt situation before you start applying for a loan. Compute your DTI. Count only income you can document with pay stubs or tax returns.  If you find yourself close to the 37 percent threshold, take steps now to reduce your monthly debt payments.

source: totalmortgage.com

New Bill Touts Shared Equity Mortgage Modifications

While the housing outlook has certainly improved significantly, some 5.1 million homeowners remain underwater on their mortgages.

This means they are unable to sell their homes because they owe more than their properties are worth, and possibly barred from a refinance unless they can take advantage of a program like HARP.

While 5.1 million is a lot less than it used to be, it still represents more than 10% of all homes with a mortgage, per data from CoreLogic.

Additionally, some two million of these unlucky homeowners owe at least 25% more than their homes are currently worth.

Clearly this doesn’t provide much motivation to stick around and make costly monthly mortgage payments, especially if these homeowners can’t take advantage of today’s low rates.


Principal Reduction Today for Your Appreciation Tomorrow

Enter a new bill aimed at tackling the problems associated with underwater mortgages, like high default rates and zombie foreclosures, the latter of which results in property blight.

The so-called “Preserving American Homeownership Act,” introduced this week by U.S. Senator Robert Menendez (D-NJ) is essentially a shared equity mortgage modification program.

It’s supposed to be a win-win situation for both homeowners and lenders, giving each party motivation to modify and keep up with payments, respectively.

The way it works is fairly simple. A borrower with an underwater mortgage has their principal balance reduced to 100% of the current value, provided the borrower can make payments.

The principal reduction takes place over a period of three years or less, in increments of one-third each year. So if borrowers make timely payments their principal balance will be reduced further over time.

The mortgage rate may also be cut if the principal reduction isn’t enough to make payments affordable.

Once it comes time to sell or refinance, the bank (or investor) will received a fixed share (up to 50%) of the increase in the home’s value. This amount cannot exceed twice the dollar amount of the principal reduction.

The value will be assessed via appraisal when the borrower first enters the pilot program, and again when they sell or refinance.

The program would be available on primary and secondary homes, and borrowers would be eligible regardless of how deeply underwater they are.

The plan is to launch two pilot programs, one under the FHFA and another under the FHA.

Menendez noted that a similar program launched by a private mortgage servicer led to a near-80% participation rate and a re-default rate of just 2.6%.

That sounds pretty good, especially when you’re giving away half of your future appreciation. The question is whether this type of relief comes a little too late in the game.

But for those who really love their homes and want to remain in them, it could be a lifesaver seeing that widespread principal reduction never came to fruition.

 (photo: Jonathan McIntosh)

source: thetruthaboutmortgage.com

Refinancing the Mortgage With HARP

A few years back we refinanced our mortgage to get a lower interest rate.  At the time, we were absolutely thrilled to get a 4.875% mortgage.  I never thought I’d see rates that low.  The only drawback was that we’d stretch the loan back out to another 30 year term.  We decided to mitigate that by paying extra all year long.  We did that by signing up for the free biweekly payment program at our credit union and also added another $300 a month on top of that.  That got us back on track to pay our mortgage off much sooner than the 30 year term.

I recently started receiving offers in the mail to refinance our house because our mortgage was backed by Fannie Mae and was eligible to participate in the HARP program (if needed).  As soon as I opened each letter, I put it right in to the shredder though because I don’t trust mailings like that.  It wasn’t until I got a letter from my credit union saying that my loan was backed by Fannie Mae and I might be eligible for a lower interest rate that I really started thinking about it.  When I looked in to the current rates at my credit union, I was disappointed to see that they were significantly higher than other rates I’d seen.  Instead of going through the credit union, I remembered that I’d read about Costco aggressively offering mortgage services through a select group of banks and institutions so I gave them a try.  It turns out that Costco has, once again, squeezed many of the fees out of the process.  In order to work with Costco, banks had to agree to a $600 cap on loan costs for executive members and a $750 cap for regular members.  Normally most banks would charge a 1% loan origination fee so this saved us a nice chunk of money.  Because HARP is involved, I was also happy to hear that I didn’t have to pay for an appraisal.  This saved us another $400.  All in all, it was very cheap to go through the process.  It was also very painless.  All the interaction happened through email and they are going to come to my house to handle the signing of the documents.  The best part about all of this is that we got a 3.625% interest rate on the new mortgage.

While I’ve been really pleased with the whole process, I was kind of shocked at the amount of detail they wanted us to provide.  We both have credit scores over 800, flawless credit, no debt other than the mortgage, and have really good salaries.  Based on the amount of information we had to provide, you’d never believe we were a good credit risk.

In order to process the loan, here’s what we had to provide:

• 3 pay stubs for each of us
• 2010 tax return
• 2011 tax return
• Proof of insurance on primary home
• Proof of insurance on vacation home
• Latest bank statement
• Proof that home equity loan has a zero balance
• Homeowners Association Bill
• W2 for 2010 for each of us
• W2 for 2011 for each of us
• Settlement statement from last refinance a few years ago

Like I said, you’d think we had bad credit or something.  Things have definitely changed since the high flying days of 2008.  If they are doing this much due diligence with us, I’m sure there are a LOT of people that are out of luck when it comes to getting a mortgage.

Anyway, we are glad we’re doing it.  The 3.625% rate is unbelievable.  Between the rate and putting an extra $20,000 in cash to pay down the balance even further, we’re going to see our payment drop by $400 a month.  We’ll actually be paying more than that because we want to pay the house off much earlier than 30 years but it’s nice to know that if we ever lost our jobs or fell on hard times, we’d have a much lower mortgage payment to deal with.

source: everybodylovesyourmoney.com