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Buy now? In four months? In a year?
Some of the stress can be taken out of the home buying decision when you realize that mortgage loans can always be re-financed, although with some fees and hassle. Keep in mind, too, the old saying,
“The best time to buy real estate is always 10 years ago.”
Ten years into the future, you won’t remember how you fretted over whether you should wait or buy right now. You’ll have 10 years of family memories in the home and neighborhood you’ve come to love.
All this said, when making this huge decision, it’s wise to research where mortgage interest rates are going in 2016. This past spring the most influential economists predicted that the Federal Reserve would raise the prime rate this fall in the August meeting. But then China became unstable, Greece revisited bankruptcy and American employment figures disappointed many. Interest rates stayed the same.
So, once again, now in the fall of 2015 pundits expect Janet Yellen and “the Fed” to hold off raising the prime rate (which in turn raises the mortgage rates) until the beginning of 2016, if then. Keep in mind, too, that America is facing a new challenge. The millennials, many of which are going into their home-buying 30s, seem to be holding off on buying homes. With their parents impacted by the recession, students themselves took out loans, many of which were as predatory as the balloon and interest only home loans that got their parents into trouble. Recent grads now shoulder an average of $30,000, and some have $100,000. They’re paying interest and principle on this big debt, eating into their home fund monies.
Particularly after seeing parents and friends lose homes, this huge generation (90+ million by most counts) seems fine with renting for the foreseeable future. In fact, it’s the renting millennials who’ve driven rental prices up in the past three years. Millennials aren’t exhibiting the home ownership drive their parents did. They’ve learned that Europeans rent families rent the same homes for generations, and don’t necessarily see home buying as the only signal of success. Finally, the tiny home and simplicity movements tell us that the millennials may not buy into the 3,000 square foot, brand new home. Therefore, home prices may not rise as they did in in the early 2000’s.
For now, housing prices may rise a bit over the next year, but most agree that they won’t skyrocket. Federal Reserve officials keep dropping that they’ll raise rates only when the data indicates the economy is heating up. With this month’s disappointing employment report, yet again, that doesn’t look like a possibility soon. Keep in mind that for the last three years, quarter after quarter, economists have been saying that THIS is the quarter the economy will rebound with a vengeance. Still, we’ve had at least 12 quarters of just tepid growth.
If unemployment takes a big dip and inflation looms on the horizon, Yellen will have to tighten. If that first rate hike doesn’t torpedo the stock market, she will continue throughout the year, but ever so gently.
The bottom line? Mortgage rates creeping up but very slowly in 2016. Watch the employment reports. The minute “employment leaps,” rate increases will heat up.
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Comparing mortgage loans is one of the most important things you can do when you’re buying a home. The decisions you make will determine the size of your monthly payments, how much you pay upfront, and how much interest you’ll pay over the life of the loan.
You might find it simpler to compare loans if you ask each lender a series of questions, including:
Find out the answers to these questions no matter what type of loan you’re considering. Each can affect the overall cost of your loan. If you are considering an adjustable-rate mortgage, or ARM, you can compare loans by asking:
ARMs are inherently more risky than fixed-rate mortgages because you’re gambling on whether interest rates will go up or go down before your rate adjusts. Understanding the best- and worst-case scenarios can help you weigh the pros and cons as you compare loans. But there’s one other big question to consider before you get an ARM:
If there’s not much difference when you compare the two, the fixed-rate loan might be a safer bet. You won’t save much in the short-term, and could save a lot over the long term. Plus, you reduce your risk if interest rates shoot up and you can’t refinance before the rate adjustment. Finally, to truly compare loans, you have to ask yourself some questions:
In the end, the best loan is the one that works for your needs.
Shopping for a mortgage can be intimidating. It’s natural to feel anxious about doing something new for the first time, and getting your first mortgage is no exception.
Fortunately, there are a few simple things you can do to make sure you’re being well-prepared before you start looking for your first home loan. Here are five tips to help first-time mortgage borrowers.:
1. Lock Your Interest Rate. Interest rates on mortgages can increase or decrease from day to day or even hour to hour. Discuss the interest rate outlook with your loan officer and try to learn as much as you can about how ups and downs in interest rate quotes might affect your mortgage payment and your ability to qualify for that loan. To protect yourself from interest rate rises, ask about a rate lock, which can reserve a specific interest rate for you for a set time period. If you decide to lock your rate, make sure your lock period won’t expire before your closing date. (Read more about locking your interest rate.)
2. Consider FHA. If you’re a first-time home buyer, you might want to shop for an “FHA loan,” which is a mortgage that’s insured by the Federal Housing Administration (FHA). FHA loans offer competitive interest rates, allow smaller down payments and have easier qualification guidelines compared with other types of loans. The minimum down payment for an FHA loan is just 3.5 percent of the purchase price of the home, although FHA loans do require that you pay mortgage insurance.
3. Take the Tax Credit. If you haven’t owned a home in the past three years, you may be able to qualify for the federal First-Time Home Buyer Tax Credit, which is worth up to $8,000. The credit is refundable, which means you’ll even get a rebate of sorts from the federal government if the income tax that you owe is less than the full amount of the credit. The credit is subject to income limitations and you’ll have to act fast since it’s set to expire after Nov. 30, 2009. Some lenders may allow you to use the credit as a down payment, to pay settlement fees or other closing costs or to pay discount points to reduce the interest rate on your loan.
4. Educate Yourself. A plain-vanilla 30-year or 15-year fixed-rate mortgage is fairly easy to understand. But other types of loans can be more complicated. If you want to consider an adjustable-rate mortgage (ARM) or other less common type of loan product, do your homework and make sure you fully understand how your loan works before you sign the loan documents.
5. Shop Around. Interest rates, loan products and loan terms vary among lenders. That means all borrowers, whether novice or not, should shop around for loan offers. Ask about the benefits and risks of each loan and be sure to compare the quoted points and estimated closing costs as well as the interest rates on different loans before you decide which would best fit your personal
Deciding what type of home loan is best for your needs might be the most trying part of the home-buying process. Your decision involves seven components.
1. Loan amount
The amount that you qualify to borrow depends on your income, expenses, down payment, and current mortgage rates. Most importantly, it should be an amount that you’re comfortable borrowing.
2. Mortgage features
There are several types of home loans. Fixed rate mortgages, or FRMs, come with rates that do not change. You make equal payments for the life of the loan. Adjustable rate mortgages, or ARMs, come with rates that move up and down as financial markets change – in general, ARM rates drop when the economy dips and increase when the economy heats up.
Hybrid ARMs combine the features of both fixed and adjustable rate mortgages. They come with a rate that’s fixed for an introductory period – typically three, five, seven or ten years – and then they convert to ARMs and begin adjusting at regular intervals. Typically, the longer a mortgage term is fixed, the higher the interest rate, and the shorter the fixed period, the lower the interest rate.
Then, there are features like interest-only payments, which lower your payment in the first few years of your loan, buy-downs like the 3-2-1, which are fixed loans with rates discounted by three percent in year one, two percent in year two, and one percent in year three. Other specialized loans include energy-efficient mortgages (EEMs), rural housing loans, manufactured home financing and FHA rehabilitation loans.
3. Mortgage rate
Interest rates are the most visible part of any mortgage advertisement, but finding the best deal isn’t as simple as looking for the lowest posted rate. A loan with a lower rate but higher closing costs may end up being more expensive. When shopping for a mortgage, you’ll want to compare the upfront costs as well as the rates, using a Good Faith Estimate (GFE) and looking at the annual percentage rate, or APR.
Lenders may offer you the chance to pay discount points to lower the interest rate of your mortgage. One point is equal to one percent of the loan amount. For a $150,000 loan, each point costs $1,500. Should you pay points? That depends on how long you plan to keep your home — the longer you plan to stay, the more you may benefit by paying points. The Points Calculator can help you determine if it makes sense to pay points upfront when taking out a mortgage.
4. Monthly payment
Your monthly payment should be one that you can comfortably make, given your own unique set of circumstances. In general, lower payments involve some tradeoffs. For example, to get a lower rate, you have to pay more fees, choose a loan with a shorter fixed period, or add riskier features like interest-only payments or prepayment penalties.
Higher payments have their upside and downside as well – 15-year mortgages, for example, come with higher payments, but you can be mortgage-free in only 15 years and you’ll pay much less interest. Choosing not to buy your rate down means you keep more money in your wallet and pay lower closing costs.
Lenders use ratios and formulas to qualify you for a home loan, but there are some things that only you know and decisions that only you can make. Any of the following can increase or decrease what you can comfortably spend on a home:
The mortgage term is the number of years it takes to pay it off. Most people know about 15 and 30-year loans, but you can find mortgages with five, 10, 20, 25, 40 and even 50 year terms as well. The shorter the term, the less interest you pay and the faster you gain home equity. Longer terms lower your monthly payment and may allow you to spend more on your home.
When you apply for a mortgage, lenders quote an interest rate at a specific cost. However, mortgages are traded in financial markets like stocks and bonds are – and that means rates go up and down all the time. If an increase in mortgage rates will derail a home purchase, it probably makes sense for you to lock in your rate right away. If you’re more flexible, you might choose to “float” your rate, waiting for a better deal. Don’t want to miss a drop in mortgage rates? Many lenders offer a “float down” option, for a fee. You can then lock your loan, but if rates are lower when your loan documents are drawn, you close at the lower rate.
7. Closing costs
Closing costs include lender fees and amounts paid to others, like title insurers, escrow companies and appraisers. There are likely to be prepaid expenses as well, such as property taxes and homeowners insurance.
Mortgage lenders must issue a Good Faith Estimate disclosure within three business days once you apply for a mortgage. However, many lenders will generate a GFE when you ask them for a mortgage quote, as long as you provide enough information. Others prefer to give you a worksheet instead of a GFE. Keep in mind, however, that only a GFE obligates the lender to honor the terms disclosed. When you close on your home loan, the actual settlement charges are compared to the GFE and must not vary by more than allowed by provisions of the Real Estate Settlement Procedures Act.
Buying or refinancing a home doesn’t have to be that confusing. According to research at HUD, simply shopping around for your loan and comparing a few mortgage quotes gets you a competitive deal and saves you money. And the tools on this site make it even easier.
Refinancing is simply taking advantage of low market interest rates. Refinancing your mortgage can be a financially advantageous move, particularly for those who would like to go from an ARM to a fixed interest rate. Refinancing is generally done to secure better loan terms, such as a lower interest rate. Refinancing can also be used as a way to cash out some of the equity that a property has gained. Refinancing requires a lot of planning and understanding even with urgency and contingent situations. Refinancing your mortgage could offer you financial advantages. Refinancing is an option and a financial choice that can help homeowners meet a number of goals.
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