On Wednesday, March 18, 2009, the Federal Open Market Committee (FOMC) of the Federal Reserve voted to keep short-term interest rates steady at near zero percent. In the press release issued that afternoon, the Fed also announced plans to buy up to $300 billion-worth of long-term Treasury securities from the Treasury Department, and purchase a whole lot more mortgage-backed securities from agencies like Fannie Mae and Freddie Mac. The primary goal of these Fed actions is to keep mortgage rates down and, so far, these specific tactics have been working. Since last week, the average interest rate associated with 30-year, fixed-rate mortgages has been moving lower and is expected to fall and stay below 5% in the near future. The prospect of lower mortgage rates has many homeowners thinking about refinancing their current home loans, and has lots of renters making plans to jump into the housing market. Here are some tips that both refinancers and new buyers should keep in mind:
Considering the staggering pace of price declines across the country, prospective homebuyers should try their best to get immediate equity. This is accomplished by negotiating a price for a home that’s lower than the lender’s appraised value of the home. If successful, the new homeowner gets to move into a home with immediate equity, a substantial plus in the current housing market.
First-time homebuyers who want to get the best possible home loan deal should have their financial house in perfect order before applying. Subprime lending is out and old-fashioned lending standards are back in. Prospective buyers should:
be prepared to put at least 20% down,
be ready to provide solid proof of income,
improve their debt-to-income ratio by reducing or eliminating any credit card debt, and
try their best to get their FICO credit score above 760.
Both new homebuyers and refinancers can get free access to the credit reports that lenders use by visiting AnnualCreditReport.com, a website created via Congressional mandate. A free report from each of the three consumer reporting agencies — TransUnion, Experian and Equifax — is available at no cost every 12 months. Check for errors; if mistakes are found, don’t hesitate to dispute any and all inaccurate and derogatory items. A new homebuyer who has a great credit score, strong, confirmable income and plenty of money to put down may be able to find a mortgage rate below 5%, as long as the loan isn’t jumbo or superjumbo in size (a jumbo mortgage is a home loan above $417,000, while a superjumbo is more than $650,000.) While it’s possible to find a rate below five percent on a jumbo mortgage, the odds are not good.The same holds true for refinancers looking for a jumbo or superjumbo home loan refinance. For both new buyers and refinancers, it’s important to understand what a no-cost mortgage loan or a no-cost refinance loan really means. “No cost” does not mean that closing costs (also known as settlement costs) have been erased. It means that the closing costs will be factored into the interest rate associated with the loan. Of course, this also means that, all other things being equal, the interest rate associated with a no-cost mortgage will always be higher than one where the borrower pays the closing costs up front.And there’s one more distinction to pay attention to: the difference between a no-cost mortgage and a no-cash mortgage. “No cash” means that the closing costs will be added to the balance of the amortized loan, and the borrower will pay these costs over time. This is a very important distinction, because the borrower will pay interest on any and all fees added to the loan balance.Don’t be intimidated by all these details. Use one of the many free mortgage calculators available on the Internet to figure out how much your loan is going to cost you. Remember that a “point” is simply a percentage point, so with a $200,000 mortgage that has an interest rate of 5% plus 1 point, the “point” will cost this borrower one percent of $200,000, or $2,000. Easy. A homeowner who has done the math and figured out that refinancing could save lots of money over time, and who has committed to refinancing their mortgage, should not procrastinate. In general, home values have been declining across the country, and may continue doing so for the rest of the year. Declining home values translate to declining equity, and the typical mortgage lender will offer the best refinance deals to homeowners who have at least 20% equity in their home (25% for a cash-out refinance.) A homeowner may be able to refinance a home that has less than 20% equity, but these loans are not easy to find in the current economic environment, and the terms associated with such loans wouldn’t be attractive.
Homeowners who want to refinance but can’t because they owe more on their home than their home is worth (also known as “upside down”) should focus their time and energy on making more money. Adding a part-time job or starting a side business will bring extra income into the household, income that can be used to make extra payments a mortgage.
Both new homebuyers and refinancers should be prepared to do lots of shopping around, not only to get as many free quotes and good faith estimates as possible, but also because many lenders are overwhelmed with applications right now and may turn away even the best borrowers. Borrowers who aren’t confident with their deal-hunting or negotiating skills can seek help from mortgage professionals, but they should also consider buying highly recommended books on mortgages from their favorite online bookseller.