Choosing the Best Mortgage Now

From the desk of:

Rich Storey

Mortgage Advisor

615-260-8028

Choosing the best mortgage now

Fixed? Adjustable? Terms? Here how to make the decision.

By Jeanne Sahadi, CNNMoney.com senior writer

April 27 2007: 3:39 PM EDT

NEW YORK (CNNMoney.com) -- Mortgage rates have stayed relatively low, but they are still considerably above rock-bottom levels reached two years ago, and many worry that they will ultimately head higher.

Still, that's not the only consideration when choosing a mortgage. Here's how to make the decision.

15-year versus 30-year debate

Current Mortgage Rates

Type	Overnight avgs

30 yr fixed mtg	5.44%
15 yr fixed mtg	4.83%
30 yr fixed jumbo mtg	6.43%
5/1 ARM	4.45%
5/1 jumbo ARM	5.25%
Find personalized rates:

HOME AFFORDABILITY See where you max out Gross annual income: $ Downpayment amount: $ Monthly debt: (eg. student loan, credit card payments) $ Mortgage rate: % Annual property taxes: $ Annual homeowner insurance: $

The first question you should ask is, "How much can I afford to pay on a monthly basis?"

Keep in mind, your mortgage payment is only part of what you'll pay to live in your home. You also should budget for furniture, your house's upkeep and the general expenses of life (like, say, food).

A 30-year mortgage will have a lower monthly payment and a higher interest rate than a 15-year mortgage. So you'll have a smaller monthly obligation but you'll pay more for your house over time because you're paying it off with interest for a longer period.

Conversely, a 15-year mortgage will have a higher monthly payment and a lower interest rate so you'll pay less for your house because you're paying it off in a shorter period.

"For most home buyers, especially first-time buyers, taking a 15-year (or 20-year) mortgage is out of the question," said Keith Gumbinger, vice president for mortgage tracker HSH Associates. The higher monthly payments are often too much to handle for these types of buyers.

But for home buyers with sufficient income and a desire to be mortgage-free in a short time, a 15-year loan might be a good bet.

Fixed versus adjustable-rate conundrum

The second question you should ask is, "How long will you be in the house?" You probably can't answer with absolute certainty, but you can play the odds.

Say, for example, you're single and buying a small condo but you can easily envision yourself married; or you've just started a family and plan to expand it at some point. Chances are good you'll want to trade up to a new home in five to seven years. On the other hand, maybe you've had your family and want to settle into a place with a good school system, which your kids will be using for the next 12 years.

Whatever the answer, it will help you decide whether it makes sense to get a fixed-rate or an adjustable-rate mortgage (ARM).

A fixed-rate mortgage locks in a rate for the length of your loan.

ARMs, meanwhile, are short-term fixed-rate loans: After the fixed rate term is up, the rate adjusts at regular intervals in accordance with current interest rate conditions at that time. A 5/1 ARM, for example, has a fixed rate for five years and then adjusts every year for the next 25 years. (ARMs typically run on a 30-year schedule.)

The length of the fixed-rate term on an ARM typically can range anywhere from one month to 10 years. The longer the rate is fixed, the higher the interest rate you'll get. But generally speaking -- and there have been exceptions in the past -- ARMs will cost you less in the short-term. With the ARM, both your monthly payments and interest rates should be lower than either a fixed rate 15-year or 30-year mortgage.

The risk with an ARM is that when interest rates rise, you could end up paying much more than you bargained for. "You're subject to the vagaries of the market," Gumbinger said. That's why in today's low-rate environment, he noted, "You want to maximize the fixed-rate picture to match your time frame."

If you know you'll be in a home for 12 years or more, a 30-year fixed rate mortgage might work better for you than, say, a 5/1 ARM, where you fix a rate for five years and then it adjusts every year after that. But if you think you won't be in the home longer than five or six years, a 5/1 ARM might make more sense.

A dollars-and-sense exercise

Say you need a $200,000 loan to buy a home and you can get the current average rates for a 30-year fixed, a 15-year fixed, or a 5/1 adjustable rate mortgage.

If the 30-year fixed rate mortgage is at 6.62 percent - a level it was at just a few months ago - your monthly payment would be $1,280. The interest you pay over the life of your loan would total $260,786.

With a 15-year fixed rate at 5.94 percent, your monthly payment would be $1,681. The interest you pay over the life of your loan would total $102,623, or about $158,163 less than the 30-year fixed.

With a 5/1 ARM at 4.20 percent, your monthly payment would be $978 for the first five years. The total interest you pay over the life of the loan if you stayed in your home past five years is anyone's guess because your rate would then adjust annually. But if you move after five years, that won't be an issue.

Credited to: www.CNNMoney.com

From the desk of:

Rich Storey
Mortgage Advisor
615-260-8028


Tightening Credit Becomes Bernanke Bind in Bond Purchase Unwind
By Yalman Onaran

July 24 (Bloomberg) -- Now that the U.S. economy shows tentative signs of recovery, James Bullard, president of the Federal Reserve Bank of St. Louis, wants the Fed to adopt a plan for taming the inflation he expects may follow the end of the recession. Unless the central bank puts a strategy in place and presents it to the public, inflation expectations may run rampant, Bullard says.

He’s pessimistic such a plan will be forthcoming. “I think I’m an army of one on that,” Bullard said in an interview after a speech in Philadelphia on June 30.

The Fed always faces a hard choice as recessions run their course (this one began in December 2007): It can keep pushing to revive growth and avoid deflation -- an extended drop in prices like the one that devastated the U.S. economy in the early 1930s -- or it can take aim at inflation and risk strangling the recovery before it takes hold.

The unprecedented steps the central bank has taken to battle the credit crunch, especially its purchases of mortgage- backed securities, pose an inflation risk that’s trickier than in previous recessions, says Joseph Mason, a banking professor at Louisiana State University in Baton Rouge, Louisiana.

Don’t count on the Fed to get it right, says economist Allan Meltzer of Carnegie Mellon University in Pittsburgh. The central bank has often lacked the resolve to pursue unpopular policies to keep prices in check, says Meltzer, who’s the author of two volumes chronicling the Fed from 1913 to 1986.

“The Fed throughout its history has carried out a strategy of taking care of today’s problems, not looking to the future,” Meltzer says.

Great Depression

So far, inflation has shown no signs of heating up -- nor has deflation reared its head. The U.S. core inflation rate, which excludes food and energy costs, fell to 1.7 percent as of June from 2.4 percent at the beginning of the recession. In the Great Depression, consumer prices fell for more than three years, at an annual pace as high as 10 percent.

Federal Reserve Chairman Ben S. Bernanke, who has published academic research on the Depression’s causes, is wary. He said in June that the Fed continues to watch for deflation, and he testified to Congress this week that the economy still needs support to recover, especially in light of rising unemployment. The central bank has the tools it needs to reverse its monetary easing when it’s time to fight inflation, he said.

Among the Fed governors and reserve bank presidents who oversee monetary policy, most see slow growth and deflation as a bigger risk than inflation, based on speeches they have delivered in recent months.

Fed Balance Sheet

Bullard, among the minority worrying more about inflation, says the real risk is simmering on the central bank’s balance sheet. By making loans and buying securities to unfreeze the credit markets, the Fed has doubled its balance sheet assets to $2 trillion in the past year.

About half of that expansion came through short-term lending to financial institutions. The Fed is scaling back those facilities. It’s the rest of the balance sheet growth that concerns Bullard -- especially $661 billion of MBSs acquired to push down rates on home loans. The Fed has said it may buy as much as $589 billion more.

“I call those the politically toxic assets,” says Benn Steil, a senior fellow at the Council on Foreign Relations in New York. Selling those bonds would boost home buyers’ borrowing costs and stall the recovery of the housing market.

Lender Reserves

Traditionally, the work of a central banker has been simpler: lower your benchmark rate to counter a recession and raise it when the economy recovers to prevent inflation. The current crisis shows the limits of that approach. Even after the U.S. federal funds rate was cut to zero late last year, the economic slide worsened. U.S. gross domestic product fell at a 5.5 percent annual rate in the first quarter of 2009. Bernanke responded with the loans and the purchases of MBSs, an approach known as quantitative easing.

One way to counteract the easy credit the Fed has created might be to raise the interest rate on the reserves that lenders hold at the central bank, Bernanke says. U.S. financial institutions had $781 billion of such reserves as of this week, up from just $32 billion in September 2008. The central bank got authority in October to pay interest on those funds. It has been paying 0.25 percent and can change the rate at any time.

Banks will withdraw this money when they feel it’s safe and profitable to make loans. By paying higher interest, the Fed would make it less attractive for banks to pull that money out and pump it into the economy.

Untested

There’s little precedent for managing the money supply with interest on reserves, so it may be impossible to figure out where to set the rates. “We don’t know what a percentage point change in the interest rate on reserves will do to lending by banks,” says Mason at Louisiana State.

Meltzer is skeptical that Fed policy makers will act, even if they figure out how. In the 1960s and 1970s when inflation was rising, the Fed set out goals to fight it at least four times only to back down under political pressure. Paul Volcker, who became Fed chairman in 1979, was the exception. He ignored politicians and pushed the benchmark fed funds rate as high as 20 percent in the early 1980s.

Central bankers tilt toward stimulating growth, Meltzer says, partly because Depression-era deflation is imprinted on their minds, while periods of deflation prior to the 1930s that didn’t wreak havoc are forgotten.

The perception that a central bank won’t move against rising prices can actually contribute to inflation, says William Silber, a professor at New York University. When the public expects inflation, it’s easier for retailers to raise prices and for workers to demand wage increases, he says.

Stagflation

Silber is writing a book about Volcker’s fight against inflation in the 1970s, when prices rose even during recessions. The public’s view that there was a lack of will to fight inflation helped cause this phenomenon, known as stagflation.

This is one reason Bullard wants the Fed to actually publish a plan for tackling inflation and not just draft it for internal purposes. To contain inflation, the battle often needs to begin before it’s visible -- never a politically pleasant task. Acting now promises to be especially unpalatable, with unemployment at 9.5 percent in June and home foreclosures coming at a record pace in the first half of this year.

Credited to: www.Bloomberg.com

Bernanke sends mortgage rates lower
Rates continue 'yo-yoing,' but comments from Fed chairman add downward pressure. 30-year dips to 5.55%.

NEW YORK (CNNMoney.com) -- Home mortgage rates ticked lower after Federal Reserve Chairman Ben Bernanke said the central bank will continue to keep interest rates low.

The average 30-year fixed mortgage slipped to 5.55% from 5.58% the week prior, and the 15-year fixed fell to 4.89% from 4.93%, according to the weekly national survey from Bankrate.com.
Recently rates have been "yo-yoing as corporate earnings announcements and economic data toy with investor sentiment," the report noted.

On Wednesday Bernanke gave his semi-annual congressional testimony on the state of the economy, saying the central bank will "likely keep interest rates low for an extended period of time," the Bankrate report noted.

A separate Thursday report showed sales of existing homes disappointed again in June, rising just 3.6%.

Current mortgage rates remain much lower than last year's levels, when the average 30-year fixed was 6.77%, according to Bankrate.com.

At the current rate of 5.55%, the monthly payment on a $200,000 mortgage would be $1,141.86, or about $158 less than the monthly payment at last year's rate.

Adjustable-rate mortgages: ARMs "continue to post mixed results," the report said, with the average 1-year ARM rising to 5.23% from 5.22%, and the 5-year ARM falling to 4.93% from 4.98%.

Credited to: http://www.cnnmoney.com/

From the desk of:

Rich Storey
Mortgage Advisor
615.260.8028

Mortgage applications at 7-month low
Group says requests for home loans fell 18.9% last week.

NEW YORK (Reuters) -- Mortgage applications plunged to a seven-month low last week as demand for home refinancing loans tumbled 30%, data from an industry group showed Wednesday.

The drop does not bode well for the hard-hit U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 26 decreased 18.9% to 444.8, the lowest reading since the week ended Nov. 21, 2008.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said mortgage rates are just one factor driving potential borrowers.

"Rising unemployment, concerns about job security, potential buyers' inability to sell their existing homes and problems with appraisals coming in too low are all weighing on demand," he said.

"The government needs to take more aggressive action to bring mortgage rates back down to below 5% as that seems to be a key level for the market," he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.34%, down 0.10 percentage point from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27. The survey has been conducted weekly since 1990.

Mortgage rates remained above 5% for a fifth straight week, but were well below year-ago levels of 6.33%.

Thirty-year mortgage rates had mostly been on a downward trend since the Federal Reserve unveiled its plan to buy mortgage-backed debt in late November. But the Fed met resistance in the bond market in late May and early June.

Treasury yields, which act as a benchmark for mortgage rates, rose sharply during that period. Treasury yields, however, have come down recently, allowing rates to fall.
The MBA's seasonally adjusted purchase index fell 4.5% to 267.7.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 9.2%.

Refining activity sinks:

The mortgage bankers' seasonally adjusted index of refinancing applications decreased 30% to 1,482.2, also the lowest level since the week ended Nov. 21, 2008.
Refinancings accounted for 46.4% of applications, down from 54% the previous week and significantly lower than the peak of 85.3% in the week ended Jan. 9.

The U.S. housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as the rest of the world. Economists contend that the economy might not emerge from its slump unless the housing market stabilizes.

The shares adjustable-rate mortgage activity increased to 4.3% in the latest week, up from 4.1% the previous week.

Fixed 15-year mortgage rates averaged 4.81%, down from 4.93% the previous week. Rates on one-year ARMs decreased to 6.52% from 6.54%.

Credited to: http://www.cnnmoney.com/