Monday, July 29, 2013

Mortgage Rates on the Rise

Since the housing crash, mortgage rates have been artificially low and were due to regress.  While many mortgage experts predicted that mortgage rates would increase in 2013, the recent rapid increase in mortgage rates has been quite shocking.  In a three-week period in June, rates increased a full percentage from 3.625% to 4.625% on a 30-year mortgage term.  Although rates began to stabilize in July, many homebuyers fear that interest rates may continue to rise.

The recent rate increase has led to a reduction in the number of refinance applications, however it has not impacted purchase applications or new home sales similarly.  Although rates are higher now than they were in early June, rates are still quite low when we consider historic standards.  With the possibility of interest rates continuing to rise, it may be a good time for interested homebuyers to consider purchasing now.   

For pre-qualified applicants who are searching for a new home, I suggest that you speak with your Loan Officer to determine whether your approved loan amount has decreased.  You should be aware that if you are looking to purchase a house at the top end of your budget and at your highest approved loan amount, the increase in interest rates will decrease the highest loan amount that you can qualify for.  It will also increase your monthly mortgage payment.  For example, based on a $200,000 loan and a 30 year term, a one percent interest increase would raise a mortgage payment by $116 per month.  Higher rates may not be ideal, however Ocean Communities Federal Credit Union has programs available that will allow buyers to purchase a home with little or no money down.  Our CU Realty program also offers homebuyers a rebate that can be used to reduce their closing costs.

Friday, April 26, 2013

Refinancing for a Lower Rate: How Much Do I Need to Reduce My Current Rate to Make Refinancing Worthwhile?


There are several good reasons to refinance your mortgage such as consolidating debt, getting cash out, extending your term for a lower monthly payment, but I think the rate/term refinance is my favorite.  It often puts members in a better financial position both in the short-term and in the long-term.  But, how low should a mortgage rate be to make refinancing a worthwhile decision?  I have heard several different theories on what the interest rate savings needs to be for refinancing to be advantageous.  Some say the magic number is a 0.5% rate reduction.   I’ve also heard the rule of thumb is 1% off your current rate.  However, I’ve even heard it must be at least 2%, as well.

With all these differing views, here are a few factors that I think are important for you to consider:  

Your current mortgage balance
- The greater your remaining balance, the more you will benefit from refinancing and obtaining a lower mortgage rate.

The cost of refinancing
- Financial institutions often allow you to add in all of your closing costs into your new loan.  However, closing costs do exist (even when you are only looking to pay off what you owe on your existing mortgage) and can be expensive.  Closing costs will include a full appraisal, a new title examination, lender’s title insurance, processing fees, underwriting fees, and other necessary miscellaneous fees.  These fees will increase your loan amount, which decrease your equity.

The remaining term on your loan
- As with the mortgage balance, the greater the term you have remaining on your loan, the more you will benefit from a lower interest rate.

Whether you have plans to sell your house or pay off the entire loan in the near future
- If the answer to this question is yes, you will need to calculate potential interest savings over the estimated time you plan to keep your loan, rather than the entire loan term.  The longer you plan to stay in your home without paying off the loan, the more a rate/term refinance will benefit you.

As you can see, I do not believe there is a specific numeric rate reduction needed to refinance.  Every situation is different.  As long as you are not extending the term on your loan, the decision is really simple math.  If you lower your interest rate, you will lower your monthly payment.  This will create a savings over the course of the remaining loan term.  With the current record low mortgage rates, your savings can be significant and in many cases, refinancing is a no-brainer.  You can benefit from these savings in the form of a lower monthly payment or you could chose to keep a similar monthly payment and benefit from the savings in the form of a shorter term.

A great exercise to see what your potential interest savings may be is to research the current mortgage rates and use a mortgage calculator online to compare your current mortgage to what your new mortgage would be if you refinanced.  Below, I’ve included a sample calculation to demonstrate this for you.


 


Example of Interest Savings Exercise:

 

Current loan balance:  $150,000

Remaining term:  180 months (15 years)

Current rate:  5.375%

Current monthly payment:  $1216.03

Current total payments amount:  $218,884.88

 

VS.

 

Proposed loan balance with closing costs:  $153,000

Proposed term:  180 months (15 years)

Proposed rate:  2.875%

Proposed monthly payment:  $1047.58

Proposed total payment amount:  $188,563.92

 

Current Total Payment Amount $218,884.88 – Proposed Total Payment Amount $188,563.92 = $30,320.96 Savings

 

In this case, is it worth it to add in the closing costs to your loan and go through the refinance process?  As you can see, you could potentially save more than $30,000 over the next 15 years by refinancing. In my opinion, the answer to this question is yes.  Because this exercise is an easy step in helping you consider refinancing, I would suggest taking a few minutes to plug in your numbers and check out your potential savings.

Thursday, February 28, 2013

It’s never too early to start preparing for your approval

A common theme I see in denied purchase applications is members not positioning themselves to be approved for their first mortgage loan in advance.  I so often hear statements like "If I had only known about that earlier, I could have taken care of that by now."  But, after they do take care of the item and get their credit file in order, it may be too late to buy that starter home they had their eye on. 

CU Promise loans, VA loans, FHA loans, and Rural Housing loans are all great examples of loan programs designed to get people into homes with little or no money down.  Each loan program has varying qualifying standards but many look at the same qualifying factors such as credit score, debt to income ratio, loan to value ratio, and cash reserves just to name a few.
 
Here are a few tips that can help you put yourself in position to be approved to buy your own home:

  • Make sure you have at least three trade lines reporting on your credit report for at least 12 months – Open a share secured loan or a share secured credit card if you are falling short of the three trade lines needed.
  • Get your credit score up to at least 640 – Dispute any incorrect information reporting on your credit report and make sure the dispute has been resolved before starting the application process, pay your monthly bills on time, and clean up those collections.
  • Save money – Even if you are approved for 100% financing, you may still need to pay for closing costs or leave yourself with two months worth of cash reserves in the bank.
  • Employment stability – If using either self-employment or employment income to qualify for the loan, you will need to show two full years of employment history in the same line of work.
  • Get pre-approved for a loan before shopping for your home

It is an ideal time to take advantage of the current buyers’ real estate market while mortgage rates continue to stay low.  Call 1-800-418-1486 to speak with a Mortgage Loan Officer who will be happy to find the loan program that will best fit your needs.