Mortgages

Time to Refinance Your Mortgage

Unless you have been living in a cave recently, you know the housing market has been at the center of the economic crisis. With the bursting of the housing bubble in 2007 and then mortgage-backed securities poisoning the entire financial system there is no doubt that housing has caused a lot of our economic woes.

Yet, it may just be housing that gets us out of all of this. The Federal Reserve has gone on a shopping spree the last couple of months buying Fannie Mae and Freddy Mac securities. $1.25 trillion dollars have been pumped into the system to make sure the housing market doesn’t deteriorate any more.

Before all of this there was a small light at the end of the tunnel. The only problem was no one knew if it was the train coming. Now that the government is doing everything they can to shore up the system and insure housing prices don’t go any lower, some faith and confidence has come back to the biggest asset you will ever purchase.

With all of this government backed spending in place the Federal Reserve has also taken the step of lowering interest rates to banks. The biggest effect of this is that mortgage rates go lower. While the main reason behind a move like this is to increase spending on big-ticket items like houses and cars, another effect is that people who bought their houses with different kinds of mortgages can now refinance to get the best deal out there.

There are a variety of mortgages that people use to buy houses. Here’s a breakdown of those and how the recent changes in the interest rates and housing market affect them.

Adjustable Rate Mortgages

These mortgages offered lower rates at the beginning of the loan. Customers locked into low beginning rates but after a period of time the interest rates readjusted with the prevailing rates. When the rates went up significantly the monthly payments went up as well. A lot of people who got in with ARMs found that the worse case scenario of higher interest rates and lower home values had occurred and they were stuck. Unfortunately, so many of these situations existed in the largest of the housing markets that when other economic stressor came into play, like lay offs and decreased spending, a wave of foreclosures hit the market.

When rates are at the sub 5% level like they are now, it’s a perfect time to take the uncertainty out of your monthly payment. By lowering your rates your monthly payment will go down as well and give you a little more wiggle room in your budget.

Interest Only Mortgage Rates

During the Wild West Days of the housing bubble lenders were willing to break a lot of common sense rules just to get people into a house. They would accept borrowers with no proof of income, no down payments and get them into loans where they paid nothing towards principal at the beginning.

The reasoning behind these loans was two fold. First, the lender got their money up front, and by only paying interest the monthly payment would be lower. The borrower assumed that housing prices would increase at the astronomical level they had been, and the buyers would derive equity from this.

Guess what happened? Rough times hit people and with equity in their homes and no shot at the houses appreciating anymore foreclosures hit home. Again, with lower rates on fixed mortgages people have a shot at getting out of these bad loans.

With the lowering of interest rates and the stabilizing of the housing market, now is the time to get into a predictable loan where equity can be created and a sound thirty-year plan can be set in motion.