Sandra Braunstein spoke today at the Committee on Financial Services regarding challenges facing Community Reinvestment programs.
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The Federal Reserve released this statement earlier today.
According to a survey done by the Mortgage Bankers Association mortgage loan applications were up .7% when compared to the same week during 2006. This is the second week in a row applications have been up since the previous two week run of lowered applications.
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Freddie Mac said today that the average rates on a 30 year fixed rate mortgage rose slightly last week. A 30 year fixed rate mortgage averaged 6.4 percent compared to 6.37 percent from the prior week. Fifteen year mortgages averaged 6.06 percent when compared to 6.03 percent the week before.
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We’ve talked about many of these mortgage products at length, but below is a brief breakdown of some of the most common home loan financing products and how they differ from one another. Especially in this lending climate, you can’t be too careful. Read up.
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FIXED-RATE MORTGAGE
Overview: A mortgage with payments that remain the same throughout the life of the loan, because the interest rate and other terms do not change.
Advantages: Predictable payment, you know you will not suffer when interest rates rise.
Disadvantages: An initial interest rate that will be higher than an ARM, as will the mortgage payment itself; no benefit when market rates fall.
ADJUSTABLE-RATE MORTGAGE
Overview: A mortgage loan subject to changes in interest rates; traditional ARMs typically have a fixed period with adjustable period afterwards. That period is generally made up of either 1, 3, 5, 7 or 10 years.
Advantages: Low initial interest rate compared with a fixed-rate mortgage, payments go down when market rates fall.
Disadvantages: No stability, payments change over time, payments increase when home loan rates rise.
BALLOON MORTGAGE
Overview: A balloon mortgage is a loan that typically offers low rates for a short period of time (usually 5, 7, or 10 years); after that, the balance must be paid off or refinanced.
Advantages: Lower rates than fixed-rate mortgages.
Disadvantages: Will need to pay off in short time period, may need to apply for a mortgage refinance at a higher rate than you’d like.
INTEREST-ONLY MORTGAGE
Overview: A mortgage that allows the borrower to pay only on the interest during the first few years of the loan (this model can be either fixed or adjustable rate).
Advantages: Low monthly payments.
Disadvantages: Initial payments do not reduce the principal on the loan.
PIGGYBACK MORTGAGE (or 80/20 LOAN)
Overview: Two loans taken out at once, with the smaller, second mortgage loan usually obtained at a higher rate.
Advantages: Eliminates mortgage insurance (PMI) on the monthly payment, which would be required of you if you did not make 20 percent of the purchase price as a down payment.
Disadvantages: In some cases, the total monthly home loan payment can be higher than with a 100 percent loan plus PMI.
OPTION ARM
Overview: Special adjustable-rate mortgages that allow the borrower to pay a credit card-like minimum payment that is actually less than the interest owed.
Advantages: Flexibility, low monthly payments.
Disadvantages: Possible negative amortization - your debt increases instead of decreases over time, somewhat defeating the purpose of home ownership.
SOURCE: The News-Journal
That’s the bottom line, according to the Houston Chronicle.
Adjustable-rate mortgages have an initial interest rate that is often lower than a fixed-rate loan. But their fluctuating or variable interest rates are more complex. A formula that specifies the rate index determines the interest on an adjustable-rate mortgage.
For example, a particular adjustable-rate mortgage’s interest rate may be tied to the interest rate on one-year Treasury bills, plus 2.5 percent.
Because the mortgage rates are linked to interest rate movements in general, an adjustable mortgage’s interest rate, and your payment, will change over time.
Because you are accepting a greater element risk, adjustable-rate loans start at a lower interest rate than comparable fixed-rate mortgages.
A fixed-rate loan maintains a constant and level interest rate. The primary benefit of a fixed-rate mortgage is that you know with complete certainty what your payment will be. Because the mortgage lender is locking in your rate for the entire 15- or 30-year term, you generally will pay a premium in the form of a higher interest rate.
To answer the question of whether you should take out an adjustable-rate mortgage or a conventional, fixed-rate loan, weigh two important issues:
1. How long do you plan to stay? Because adjustable-rate mortgages start at a lower rate of interest, and should remain lower unless interest rates rise, you would save money on interest charges and have lower payments in the early years of your home mortgage loan with an adjustable.
Basically, other things equal, the less time you expect to hold on to a property, the more beneficial adjustable-rate mortgages will be for your situation.
2. How much risk can you accept? Because an adjustable-rate mortgage can increase if interest rates rise in general, ask yourself if you can handle these higher payments. Make sure that your budget will allow you to accept the highest possible payments allowed on your ARM.
If you can’t afford the higher payments or you can’t deal with the stress or risk of volatile payments, you’re better off sticking with a fixed-rate mortgage.
Sometimes, prospective home buyers are steered into an adjustable-rate loan because it allows them to stretch and buy a more expensive home. Be careful that you’ve taken the time before you close on a deal to fully understand what impact higher payments might have on your budget.
In recent months, thousands of homeowners have grown uncomfortable with the rising rates on their adjustable rate mortgages. The solution?
More and more refinancing to fixed-rate home loans in order to lock in a steady interest rate and monthly payment. As a result, budgeting becomes more predictable.
These borrowers can thank the Federal Reserve, which through most of 2006 pushed up short-term mortgages interest rates, boosting the costs of adjustable-rate mortgages and other short-term loans, while the rates on long-term debt remained flat.
Jim Svinth, chief economist at LendingTree, said he’s been seeing a surge in adjustable rate mortage refinancing for the past six to eight weeks. He expects the trend to continue well into 2007.
Among the reasons people are switching is that the difference in the rate on adjustable mortgages and on fixed mortgages has narrowed. For example, the rate on a mortgage that can adjust annually was 5.84 percent in recent weeks, compared with about 6.22 percent on a fixed-rate mortgage.
Many borrowers are opting to pay a little more for the fixed-rate mortgage to avoid the risk of a reset on an adjustable mortgage in the future, Svinth said.
“We’re seeing a lot of people who are saying they’d rather pay half a percent in rate and have the security of a fixed loan, particularly given that the absolute level of rates is down,” he said.
Overall, there’s less demand for home mortgages because rates have been on the rise and prices have become so expensive that many families have been priced out of the market.
Nevertheless, Mike Fratantoni, senior economist with the Mortgage Bankers Association, an industry group based in Washington, D.C., said refinancings have been strong.
About half of all mortgage applications have been for refinancing, while home loan applications in December were at the highest level in 14 months, the association’s survey found.
The group’s latest survey of lenders of found that ARMs had fallen to 20.4 percent of mortgage applications in the final week of 2006. That’s well below the all-time high of 36 percent in March 2005 and the lowest percentage since mid-2003.
Michael L. Moskowitz, president of the New York-based mortgage company Equity Now, said each family needs to evaluate its current situation to determine if refinancing makes sense.
“If you have an adjustable-rate mortgage and it’s moved up close to the fixed rate, go for the fixed,” he said.
But homeowners with a hybrid mortgage - say a fixed rate for five years, then an annual adjustment - that has several years to go before it begins resetting “might want to stay with what you’ve got.”
Moskowitz also believes that mortgage rates “which have been pretty good … could go down another quarter point over the next year.” But he cautions: “Of course, nobody really knows for sure.”
According to the Roanoke Times, the number of borrowers who took on exotic loans in order to stretch to afford pricey homes has economists and housing analysts worried.
But with mortgage rates having fallen near their lowest levels of the year, many of those borrowers are jumping into the safety of a fixed-rate loan, says Richard Powers, general manager of Ditech.com, the online home loan provider, a unit of GMAC Residential Capital LLC.
These days, about two-thirds of borrowers who come to the mortgage company to refinance are opting to turn their adjustable-rate home loan into a fixed-rate mortgage, Powers said. The bulk of its home loan business, or about 80 percent, is comprised of mortgage refinancing activity.
“The main thing we see in terms of consumer preferences is the migration from adjustable-rate loans into fixed-rate loans. Low mortgage rates have largely driven that,” Powers said.
Meanwhile, the Mortgage Bankers Association reported that applications for mortgage refinancing were up 16 percent last week on top of a 25 percent jump the week before. Refinancing applications are now 60 percent above their year-ago levels.
The 30-year fixed-rate loan averaged 6.11 percent in the week ending December 7, according to Freddie Mac. Meanwhile, five-year hybrid adjustable-rate mortgages averaged 5.92 percent and one-year Treasury-indexed ARMs averaged 5.43 percent for the week.
For some, ARMs continue to make sense, Powers said.
“Some borrowers want the ability to manage that cash flow the way that an ARM can allow,” he said. “But most borrowers, they don’t want excitement in their mortgage payment. They want to be able to control that and eliminate as much volatility as possible. When they get this payment-change notice that says their payment’s going to go up hundreds of dollars a month, that’s usually the wake-up call. That’s why we’re seeing business benefit from borrowers who are getting into a payment that they know is secure and provides some known quantity down the road.”
The fact that adjustable- and fixed-rate loans are brushing so near to each other begs the question of why would a buyer want something that changes after five years when they could opt for a fixed-rate.
While borrowers may find better-than-average adjustable-rate mortgage deals in local markets, experts say, a fixed rate these days usually makes more sense.
On balance, the best product on the market right now is the 30-year fixed-rate mortgage because you get the stability with none of the risk, and it costs virtually the same as a product that does feature risk.
Still, there are plenty of borrowers holding home loans that promise some payment risk. A borrower who took out a typical 3/1 hybrid ARM three years ago is likely watching that rate jump to about 7 percent now as those loans reset. Many will be able to escape those loans and refinance out through a debt consolidation mortgage.
But not everyone will be so lucky - and the unlucky ones are likely to be concentrated among those who took out an option ARM, which allow people to make monthly payments so low they don’t cover the full interest charge. That unpaid interest gets tacked on to the loan principal, building an ever bigger pile of debt for the consumer, a dangerous thing if local housing values start to fall.
“Someone who took an option ARM and put very little money down and is in a marketplace where property values haven’t appreciated … those are people with increasing difficulties,” Powers said.
“They’re probably a small minority of the market,” he said. “A lot of borrowers are going to be able to refinance out … but there is going to be some fraction of the marketplace of unknown size at the moment that is going to turn around and mail the keys to the lender.”
There’s a lot to determine as you enter the homeowning process. We suggest speaking with a home mortgage broker before making any final decisions.
As you weigh various options, however, consider these briefs words of advice regarding home loan resources.
A fixed-rate mortgage might be best if:
A hybrid ARM might be best if:
An option-payment ARM might be best if:
Challenging conventional wisdom, a Merrill Lynch economist says homeowners who opt for fixed-rate mortgages over adjustable-rate mortgages today might regret it.
According to the San Francisco Chronicle, Sheryl King contends borrowers tend to pile into fixed-rate mortgages at precisely the wrong time — just before the Federal Reserve starts cutting interest rates.
It’s similar, she says, to the way in which investors tend to pile into stocks at the peak of the market.
Today, more borrowers are choosing fixed-rate mortgages, mainly because they don’t cost much more than adjustable-rate ones.
But Merrill economists predict that the economy will soon weaken and the Federal Reserve will start cutting interest rates early next year. By the end of 2007, adjustable-rate mortgages will be significantly cheaper, but borrowers who try the mortgage refinance process then could hit problems.
After the Federal Reserve started raising the federal funds rate in June 2004, homeowners started abandoning adjustable-rate mortgages “in droves,” says King.
In mid-2004, ARMs accounted for almost half of all mortgage applications measured by dollar volume, according to the Mortgage Bankers Association. Last week, they accounted for only 39 percent, including hybrid loans that are fixed for a number of years, after which they begin floating.
That means 61 percent of homeowners are now opting for fixed-rate mortgages, which is not a shock.
The yield curve is relatively flat, meaning there’s not much difference between short- and long-term interest rates. Nor is there much of a gap between adjustable and fixed-rate mortgages. When interest rates are low and the yield curve is flat, borrowers have traditionally favored 30-year fixed-rate mortgages.
“At that point, there is little benefit for taking on the risk of an adjustable rate. Right now, that’s rational behavior. The value is still in a fixed-rate mortgage,” says Greg McBride of Bankrate.com.
Today, you can get a 30-year fixed-rate home loan for about 6.4 percent. You can get an ARM tied to the one-year U.S. Treasury bill for around 6 percent.
“That 6 percent is most likely a teaser rate,” says McBride.