Adjustable Rate Mortgages Are Making a Comeback

Are you searching for the lowest refinance rates for your next home loan? Adjustable Rate Mortgages are becoming a good option with little risk from today’s best mortgage lenders. Here are some of the pros and cons of refinancing with an Adjustable Rate Mortgage in today’s market.

Adjustable Rate Mortgage Demystified

If you’re unfamiliar with Adjustable Rate Mortgages here’s the basics you’ll need to know. Abbreviated as ARM, adjustable Rate mortgage loans have an interest rate that changes at regular intervals. When the lender changes your interest rate, also called resetting your ARM, your payment amount will change based on the new interest rate.

How often your ARM resets depends on the type of adjustable rate mortgage you choose. These mortgage loans are designated by two numbers. The first number represents the fixed period of the adjustable rate mortgage and the second number is how often the home loan resets. Take a 7/1 Adjustable Rate Mortgage for example, the interest rate is fixed for the first 7 years and resets every 12 months (1 year) after the fixed rate period.

Who Should Refinance With An Adjustable Rate Mortgage?

You’ll find that Interest rates on an Adjustable Rate Mortgages are typically lower than 15-year fixed mortgage rates. Considering that the average homeowner refinances every 4-5 years a 5/1 or 7/1 Adjustable Rate Mortgage could be an excellent choice if you need a short-term mortgage as a bridge before selling or refinancing down the road. Taking advantage of the lower interest rates offered by and adjustable rate mortgage will get you a lower, fixed payment for five to seven years.

What Are The Risks of Adjustable Rate Mortgage Loans?

The main risk when refinancing with an ARM is that interest rates will go up when the lender resets and take your payment along for the ride. Many Adjustable Rate Mortgages are tied to the LIBOR index which is a European index susceptible to all the economic turmoil going on in the European Union. If you have a low tolerance for financial risk your best bet for mortgage refinancing might be a 30-year fixed rate mortgage.

Another problem homeowners run into with Adjustable Rate Mortgages can be the lender’s prepayment penalty. If your Adjustable Rate Mortgage has a prepayment penalty in the loan contract and you sell or refinance before the penalty ends you could be facing a hefty fee at the end of your ARM’s fixed rate period.

Should You Choose an ARM for Your Next Home Loan?

The answer to this question depends on your needs and goals for your home loan. If you need the lowest possible mortgage payment choosing a 5/1 ARM will get you the lowest refinance rates. Sticking with a 30-year term length with your Adjustable Rate Mortgage will ensure you get the lowest monthly payment.

If your goal is to build equity in your home and you’re ok with the risk a 15-year Adjustable Rate Mortgage will give you the best of both worlds; lower payments than fixed-rate mortgages while building equity at an accelerated rate over a 30-year mortgage.

Other Factors to Consider than Just the Lowest Refinance Rates

One of the most common mistakes people make is focusing on getting the lowest refinance rates at the expense of fees. The more you pay when refinancing your home at closing the less benefit you’re getting from having low refinance rates. If you’re not able to break even recouping your out-of-pocket expenses paid at closing you’re going to be losing money no matter how low your interest rate.

Some of the most commonly overpaid fees include the broker’s loan origination fee or paying for discount points. These fees are not only negotiable by vary widely from one mortgage lender to the next.

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You can learn more about getting the best deal on your next home loan from today’s best mortgage companies by checking out my free Underground Mortgage Videos.

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Rate vs. APR

What’s the difference when comparing mortgage rate vs. APR and will choosing the wrong one cost you? When shopping for the lowest refinance rates you’ll always find two percentages advertised by the best mortgage lenders. Which one should you trust? Here are several tips before you refi to help you make an informed decision for your next home loan without leaving cash on the table.

Mortgage Rate vs. APR

Simply put, mortgage rate is the interest rate that your payments are based on each month. APR is a government concocted yearly percentage that factors in expenses such as your loan origination fee which intended to give you an idea of the total cost of a mortgage loan. As a tool for shopping for the best home loan can looking at rate vs. APR can help you avoid costly mortgage mistakes?

APR was intended to show you the true cost of your home loan.

Your APR tries to answer the question, if my mortgage is for x amount of dollars and it costs me this much to pay it off after 30 years, my total interest rate would have been this.

Rate vs. APR Limitations

The problem with comparing Rate vs. APR is that there are limitations based on a several assumptions made by the calculation. Comparing rate vs. APR is NOT the apples-to-apples comparison it was intended to be, not even close.

For one thing, Truth-in-Lending laws require banks and mortgage lenders to give the Truth-in-Lending disclosure; however, there are no standards for how it is calculated. Lenders all have their own calculation and not all the costs are included making the calculation worthless for any apples-to-apples comparisons.

The lender’s calculation also assumes you’ll keep the home loan for 30 years without refinancing, which considering the average homeowner refinances every four years is a big assumption. If you pay so much as $1 dollar extra towards the principal balance the calculation is also no longer valid.

APR for ARMs

Sometimes you’ll see lenders advertise ARM loans with an Annual Percentage Rate that is lower than the interest rate. Deceptive? Impossible? This happens when the calculation is made using the fully indexed ARM including the lender’s margin AFTER the loan resets. Indexes used on Adjustable Rate Mortgages are at historically low levels and the calculation in this case is making the assumption that the index will go down once the loan resets.

This is all hypothetical of course making the Rate vs APR comparison less than worthless for ARM home loans. The important lesson to learn is that Rate vs. APR is not the way to shop for a new home loan. The best way to compare to mortgage loans, especially when refinancing, is to look at interest rates compared to closing costs. Ignore the Truth-in-Lending disclosure completely when choosing from today’s best mortgage lenders and you can save yourself thousands of dollars.

Beware Unnecessary Fees When Refinancing

Did you know that the closing costs you pay are the most important aspect of your new home loan? Rather than getting caught up on comparing Rate vs. APR pay attention to unnecessary discount points or the origination fee when shopping for mortgage refinancing. The more you pay closing on your new home loan the longer it’s going to take you to break even recouping your out-of-pocket expenses. Overpaying at closing can even make it impossible to break even meaning you’re losing money no matter how low the refinance rates.

Common junk fees to be on the lookout for include application fees, processing fees, courier fees and the dreaded lock fee. Paying more than one percent for the loan origination fee is also considered junk as many community based credit unions offer zero or ridiculously low mortgage origination fees compared to the top mortgage lenders.

Paying unnecessary discount points is also a waste of money as interest rates are near 60-year lows; however, most lenders quote rates that include points. As you can see there’s more to think about when it comes to your next home loan than rate vs. APR. The good news is that free help is available to you for less than an hour of your time.

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You can learn more about getting the best deal on your next home loan by avoiding lender junk fees and unnecessary points by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to help you avoid lender junk fees and get the best deal on your next home mortgage…

40 Year Mortgage Rates

If you’re considering refinancing you might be tempted by the payment that comes with 40 year mortgage rates. Spreading your home loan payments out over 40 years instead of 30 will get you lower payments; however, is it worth paying the lender for an extra ten years of interest? Here are the pros and cons of 40 year mortgage rates to help you make an informed decision for your next home loan.

40 Year Mortgage Rates

Are there any advantages to choosing 40 year mortgage rates for your next home loan?

Many lenders are offering longer term lengths as an alternative to the traditional 30-year mortgage. Are these home loans a good idea or is choosing too long of a term length a mistake?

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40 Year Mortgage Rates Review

The majority of homeowners in the United States choose 30 year mortgage rates without giving a second thought. That includes adjustable rate mortgages like the popular 5/1 and 7/1 hybrid ARMs. You might be asking yourself “why would anyone drag out their home loan for 40 years?” By choosing 40 year mortgage rates for your next home loan your amortization schedule is based on 40 years instead of 30 resulting in lower payments.

Here’s an example to illustrate how lengthening the term gets you a lower payment amount:

Suppose you’re refinancing your home for $300,000. Based on your financial details you qualify for 30 year mortgage rates at 3.9 percent which gets you a payment of $1,410 per month. If you were to choose 40 year mortgage rates you’d qualify for 4.3 percent and a monthly payment of $1,300.

That’s a (perceived) savings of $110 per month. It’s worth noting that interest rates of this type are slightly higher than traditional 30 year refinance rates. Longer term lengths pose higher risk for lenders and therefor come with higher interest rates. Some borrowers might find they qualify for this type of home loan and not 30 year based on their debt-to-income ratio.

Disadvantages of 40 Year Mortgage Rates

Having a lower payment is all fine and dandy but what’s the down side of choosing this type of home loan? Your monthly payment might be lower ($110 per month in our example), the amount of interest you’re paying over the duration of your home loan is astronomical.

Another downside is that because your amortization schedule is spread out over 40 years instead of 30, you’re building equity in your home at a much slower rate. In an economy that’s seeing declining home values you could find yourself underwater. (Meaning you owe more than your home is worth which could make it very difficult to refinance later.)

Should you choose 40 year mortgage rates for your next home loan? I would recommend this type of loan only as a last resort if no other options are available for you. If you’re considering mortgage refinancing with 40 year mortgage rates you’ll never recoup your out-of-pocket expenses paid at closing making this type of home loan a losing proposition from day one.

You can learn more about avoiding common mortgage mistakes and getting the best deal on your next home loan by checking out my free Underground Mortgage Videos.

15 Year Mortgage Rates

If you’re looking to buy a home or considering refinancing don’t overlook 15 year mortgage rates. Most homeowners in the United States choose 30-year term lengths without thinking twice. There are many advantages to 15 year mortgage rates including dramatic savings over the lifetime of the loan. Here are the pros and cons of choosing 15 year mortgage rates for your next home loan.

15 Year Mortgage Rates

Choosing 15 year mortgage rates offers dramatic savings over 30-year term lengths.

Most American homeowners choose 30 year mortgage loans without thinking twice. Here’s why you should reconsider that decision for your next home loan.

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15 Year Mortgage Rates Offer Dramatic Savings

The most obvious advantage of choosing 15 year mortgage rates is that they are lower than 30-year fixed AND 30-year Adjustable Rate Mortgages. While your monthly payment will be slightly higher because you’re choosing a shorter term length, the amount of cash you’ll be stuffing in your lender’s pockets is dramatically less over the lifetime of your mortgage.

The downside of 15 year mortgage rates is that your payment amount can seem higher, especially if you’re used to paying on a 30-year home loan. For every $100,000 that you borrow based on today’s purchase and mortgage refinance rates, $700 is applied to paying down your principal balance. If you choose a 30-year fixed rate mortgage only $470 of your payment is going towards your balance, you’re stuffing the rest in your lenders pocket.

The aggressive repayment schedule that comes with 15 year mortgage rates means you’re saving nearly $45,000 per $100,000 that you borrow over the lifetime of the home loan.

The math works out to a whopping 48% difference in the amount of your monthly payment going to pay down the balance vs. paying interest in favor of 15 year mortgage rates. Check out the amortization schedule on your 30-year home loan and you’ll find in the early years most of your payment goes to pay the interest.

Slightly Higher Mortgage Payments

Because your home loan is amortized over 15 years instead of 30 years, choosing 15 year mortgage rates means your monthly payments will be higher. Here’s an example to illustrate a typical mortgage refinancing transaction:

The monthly payment with a 15-year term length works out to $1,771.90. Choosing the 30 year term length at 4% gets you payments of only $1,193.54. Even though the interest rate is higher, spreading the payments out over 30 years gets you lower payments. This seems like a good idea until you compare loan amortization between the two.

Remember, in today’s market choosing 15 year mortgage rates will save you $45,000 per $100,000 borrowed. That’s dramatic savings.

Beware Unnecessary Discount Points & Fees

When researching purchase and mortgage refinance rates I’ve seen quotes that included as many as two discount points. If you’re not already familiar with points, this is a fee you pay to buy down your interest rate. One point is one percent of your home loan and gets you a discount of .25% per point. Should you pay discount points?

Purchase and mortgage refinancing rates are already near sixty year lows and paying discount points unnecessarily only drives up your closing costs making it more difficult to break even recouping your out-of-pocket expenses. You recoup these expenses from the savings you’re getting by lowering your payment amount and/or term-length. If you sell your home or refinance again before breaking even you will lose money regardless of low refinance rates.

You can reduce the amount of time it takes to break even by paying less at closing. Avoiding unnecessary discount points and paying less for the loan origination fee not only saves you thousands of dollars but allows you to reach that break-even point much more quickly.

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You can learn more about paying less at closing when mortgage refinancing by checking out my free Underground Mortgage Videos.

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Refinance Rates vs. APR: Beware Common Mortgage Mistakes

If you’re considering mortgage refinancing to take advantage of today’s low refinance rates, you might be shopping using the Annual Percentage Rate (APR) to compare offers from today’s best mortgage lenders. It’s a myth that you can rely on the APR when it comes to refinance rate shopping; it simply doesn’t work. It doesn’t matter if you’re considering traditional mortgage refinancing, FHA, VA, or even jumbo home loans, that Annual Percentage Rate is deceptive and relying on this figure can result in overpaying thousands of dollars. Here’s what you need to know to avoid this common mortgage refinancing mistake.

What is the Annual Percentage Rate (APR)?

Created by the government, the Annual Percentage Rate is intended to tell you the true cost of your mortgage, from the day you close until paying off your home loan. It is supposed to factor in the size of your mortgage, any prepaid items, closing costs and interest over the lifetime of your home loan expressed as a yearly percentage of your loan amount.

You’ll find the Annual Percentage Rate at the top of the Truth-in-Lending disclosure form. The law requires your lenders to disclose the home loan’s APR whenever giving you a quote. This law was intended to give homeowners better tools for making informed decisions when it comes to mortgage rate shopping; however, Federal Truth-in-Lending laws have been a dismal failure to his day.

If you’re looking for an apples-to-apples comparison of mortgage refinance offers across different lenders the APR is not the way to go. The problem with APR is that lenders manipulate the calculation based on their fictitious Good Faith Estimate to make their loan offers seem more attractive.

What’s Wrong With Your Bank’s APR?

One of the biggest flaws with Annual Percentage Rate is that the calculation is based on the assumption that you’ll keep the mortgage until the end of its term. The term length of your home loan is the amount of time you have to repay the mortgage. APR assumes you won’t sell or refinance before paying off your home. It also assumes you’ll only make your exact monthly payment and will never pay extra towards the principal balance.

If you ever refinance or pay a little more towards your mortgage balance the Annual Percentage Rate you used to choose the “best” offer is no longer valid. It also fails if you paid discount points when mortgage refinancing to buy down your interest rate. Points are a common ploy used by lenders to make their offers seem better than they really are.

Paying discount points on your refi only makes sense if you’re able to recoup the closing costs from your lower payment amount. If you sell or refinance again before breaking even on your out-of-pocket expenses you’re going to be losing money no matter how low your mortgage rates.

Even though you’re paying more at closing with discount points, because the interest rate will be lower, the APR on the more expensive home loan will also be lower.

This why the Annual Percentage Rate used by your bank is flawed, and doesn’t give you an apples-to-apples comparison when shopping for the best refinance companies. In fact, if you rely solely on APR you’ll wind up with a home loan with the highest out-of-pocket closing costs.

Another area where the APR fails is the third-party costs like attorney fees, title, and appraisal costs. These are subject to change on every mortgage refinance loan and are not part of the Annual Percentage Rate. Banks and lenders frequently low-ball these expenses to make their APRs seem more attractive. The Annual Percentage Rate also fails to take into consideration future rate increases on Adjustable Rate Mortgages.

How to Shop the Lowest Refinance Rates & Fees

The best way to shop for the best mortgage offer is to compare rates and all fees. Don’t rely only on the Good Faith Estimate but reconcile everything with the HUD-1 Settlement Statement. Don’t be afraid to challenge the fees you find in your loan documents. Administrative, application and courier fees are usually junk that can be avoided.

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You can learn more about getting the lowest refinance rates from lenders like Amersiave and USAA Mortgage Rates by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to get started finding shopping for today’s lowest refinance rates & fees…