How to Refinance a Mortgage

After years of easy mortgage loans, some lenders are starting to tighten their lending standards. This comes after Alan Greenspan, chairman of the Federal Reserve, expressed concern over the lax standards mortgage lenders are using to approve loans. Many mortgage lenders have offered new mortgage loan products over the past years that are designed to make purchasing homes more affordable and allow more people to cash out equity from their homes without increasing monthly payments. Today, in what appears to be a reversal, many mortgage lenders are raising their standards for offering these loans to consumers. Interest rates for many mortgage loans are rising as the Fed has raised short term interest rates for the 11th consecutive time. Many mortgage lenders are now making it difficult for homeowners to qualify for mortgage loans. Mortgage lenders are cutting back on the riskier mortgage loans they make or raising interest rates on these loans.

One of the larger mortgage lenders has told brokers that it will make it more difficult to qualify for option adjustable rate mortgage loans. With the new rules, potential borrowers will have to show they can afford the payments on the loan when the interest rate goes up after the introductory rate terminates. Currently, the interest rate for qualifying for this type of loans is 5.25 percent. Many mortgage lenders are making their loans more expensive, which could discourage mortgage borrowing. The changes come as lawmakers are sounding the alarm about risks in the mortgage industry. Fed chairman Alan Greenspan stated that the dramatic rise in option and interest only loans could be dangerous for the economy. If the housing market declines, lawmakers are concerned that foreclosures could skyrocket. For homeowners, the changes in lending standards could make it more difficult to afford homes; this could cause the housing market to cool. This could take many people out of the housing market. This change in mortgage lending is not widespread yet; many mortgage brokers say they have not seen any changes at all yet.

Raising the interest rates on mortgage loans increases the monthly payment a homeowner make; especially in the mortgage’s early years. Tighter lending standards also come because profit margins for lenders are shrinking. Credit agencies are also tightening standards for mortgages. Other changes may be less prominent for homeowners; at least for the short term. Many lenders that sell option adjustable rate mortgages (ARM) are raising the margin used to set the interest rate on the mortgage once the introductory period is over. To set the interest rate on the mortgage, lenders usually add the margin and an index that measures short term rates. Because the index used goes up with market rates, the lenders wider margins will be an extra cost for borrowers on top of any increases in short term rates.
The problem with option ARM loans is that the introductory rate is very low and the monthly payment is not high enough to cover the interest due during the early years. This means that interest is added to the principal balance; this is called negative amortization. The borrower ends up with a larger mortgage loan then they started with. Homeowners could also find sharp increases in their monthly payments later on down the road when their payment is reset to a 30 year term. Before the recent lending changes, increases in short term rates have been making option ARM loans much less attractive. Along with these changes, many mortgage lenders are pushing homeowners to loans that have prepayment penalties. Lenders are doing this to discourage homeowners from refinancing mortgage loans.

Concerns over inflation are driving mortgage rates higher for the third straight week. The interest rate paid for a 30 year mortgage was 5.91% this week, up from 5.8% last week. Last fall the rate was 5.72%. The average interest rate for a 15 year fixed interest rate mortgage was 5.48%, up from 5.37% the week before and 5.13% last fall. Five year Treasury indexed adjustable rate mortgages (ARMs), were 5.44%, up from 5.31% last week. One year Treasury indexed ARMs are up 4.68%, from 4.48% last week. At this time last fall, the one year ARM was 3.97%.

Economic conditions are currently a mixed bag for mortgage interest rates. This week the jump in mortgage interest rates reflects market anxiety over inflation, energy price increases, and lack of consumer confidence. All together, these changes hint of decreased personal spending until the end of the year which should drive mortgage interest rates even higher.

The Federal Reserve has vowed to keep its war on inflation going. To do this, it will raise interest rates in up coming meetings. Although Fed changes affect shorter term Treasury yields, the outcome of these meetings seems to sway long term mortgage interest rates.

Homeowners who do not understand their flood insurance or homeowner policy would be smart to purchase good life insurance. When Armageddon strikes, the reality of your insurance situation could cause you a heart attack. If you have both homeowners insurance and a flood insurance policy on your home, you might not have the protection you think you have. There are some restrictions that can prevent you from collecting after a disaster. The first loophole the insurance company uses is the policy deductible. Most homeowners know this because they have a deductible with their health insurance and car insurance. A deductible is the portion of the expense or loss that the person with the policy must pay before the insurance pays a penny.

For a homeowners policy the deductible is typically $250 up to $1,000. If you choose a higher deductible your monthly premiums will less. A $500 deductible is very small compared to the loss of a $250,000 home, it will discourage small claims on the policy. Insurance companies know that if there were no deductible the number of claims they process would skyrocket. Choosing a higher deductible will save you a lot of money during years where you have no problems with your home. However, it does come as a shock to find out $1,000 of your damage is not covered on your claim.

Review your homeowner policy; is it considered a valued policy? Valued policies are ones that pay the full amount of coverage in case of total loss. For instance, if your home were blown away by Hurricane Rita, but not flooded, and it costs $200,000 to rebuild, if your policy is valued with a $150,000 limit, you would receive $150,000.

What is the difference between a guaranteed replacement cost policy and an actual cash value policy? A guaranteed replacement cost insurance policy pays the cost to rebuild after total destruction regardless of the limit on your policy. If your home is totally destroyed and costs $300,000 to rebuild, a guaranteed replacement insurance policy will pay $300,000 even if you are insured for only $150,000. It always smart to photo document special features of your home, in case you have problems with claims adjuster working on your claim. Even if your home is not a total loss, the replacement costs versus cash value can leave you high and dry. Replacement cost policies pay for replacement or repairs based on the actual cost of materials and labor. Suppose a violent wind tears a section of asbestos roofing shingles off your home; with a replacement cost insurance policy the insurance company will process your claim for the expense of the shingles and labor. The actual expense of repairing your roof could wind up costing you more that you get from the insurance company.

More on Flood Insurance.

Flood insurance is not considered a valued policy; your flood insurance pays only up to the policy limit. If your home is insured for $200,000 and is lost to flood damage, $200,000 is the most you can claim even if it cost $300,000 to repair your home. You will also have to choose a deductible for flood coverage. Flood insurance can be purchased for replacement cost or actual cash value like homeowners insurance; however, your personal property and some things like carpet are always paid on an actual cash value basis.

If you haven’t reviewed your policy to ensure you have enough coverage for your home and household items, Click here to get started.

The booming real estate and mortgage market in the United States is leading to a worrisome drop in standards for mortgage lending warned Alan Greenspan, chairman of the Federal Reserve. Alan Greenspan expressed concern for floating rate mortgages, interest only loans, and other exotic means of financing including option mortgage loans where homeowners have the option to pay interest for a period and that interest is added to the principal balance.

Mr. Greenspan went on to say that use of home equity lending accounted for about 80 percent of the rise in home mortgage debt in this country. Homeowners in the US have $7 trillion in home mortgage debt this year, way up from $4.82 trillion in 2000. Home equity liquidation takes place by the profit realized from the sale of the home, cashing out equity by refinancing a mortgage, or borrowing against value of the home with a home equity loan. Only 25 percent of homeowners are using this equity to pay off other debt. Some use cash from to upgrade their homes or even purchase second homes.

This boom in the mortgage and housing industry could spell trouble for homeowners if mortgage interest rates rise; home sales and mortgage refinancing would slow, and spending would also drop. Going one step further, this could hurt the economy. Many lenders are gearing up for the coming boom in mortgage foreclosures. What can you do to protect yourself and your family? Sign up for our free eZine: Five Things You Need to Know

If you are purchasing your home with cash for only a five or ten percent down payment, should you consider a piggyback mortgage loan or private mortgage insurance? Many industry experts recommend piggyback mortgage loans in the present economy. If mortgage interest rates continue to go up this recommendation could change in favor of private mortgage insurance. In most cases, potential home buyers that do not have a 20 percent down payment have to purchase private mortgage insurance. PMI protects the lender in case of default on the loan, and it the homeowner that pays the monthly premium. An attractive alternative to PMI are the piggyback mortgages. These loans are called piggyback because a second mortgage loan is piggybacked onto the first mortgage loan. This can be much less expensive than PMI. There is a catch, not everyone will qualify for this type of loan. A piggyback mortgage loan is a second loan that closes at the same time as the first mortgage loan. Typically the first mortgage loan is only 80 percent of the home value.

A piggyback loan is usually for 10 percent of the remaining balance, after that the purchaser has to come up with the rest as a down payment. Piggyback mortgages are also called 80-10-10 loans. Some lenders even allow second mortgage loans up to 15 percent and even 20 percent of the home value. Interest rates on the second loan vary; they are often one to two points higher than your first mortgage as these loans are riskier for mortgage lenders. To learn more sign up for our free guide: Mortgage Refinancing, What You Need to Know.