Interest Rates are at All-Time Record Low

Interest Rates are at All-Time Record Low
Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates finding new all-time record lows continuing to help keep homebuyer affordability high. 

The 30-year fixed averaged 3.84 percent, down from its previous all-time record low of 3.87 percent last registered on February 9, 2012. 
The 15-year fixed averaged 3.07 percent, also dropping below its previous all-time record low of 3.11 percent set April 12 of this year. 
The 1-year ARM also averaged a new all-time record low in the PMMS at 2.70 percent. 

News Facts 

• 30-year fixed-rate mortgage (FRM) averaged 3.84 percent with an average 0.8 point for the week ending May 3, 2012, down from last week when it averaged 3.88 percent. Last year at this time, the 30-year FRM averaged 4.71 percent. 
• 15-year FRM this week averaged 3.07 percent with an average 0.7 point, down from last week when it averaged 3.12 percent. A year ago at this time, the 15-year FRM averaged 3.89 percent. 
• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.85 percent this week, with an average 0.7 point, unchanged from last week when it averaged 2.85 percent. A year ago, the 5-year ARM averaged 3.47 percent. 
• 1-year Treasury-indexed ARM averaged 2.70 percent this week with an average 0.6 point, down from last week when it averaged 2.74 percent. At this time last year, the 1-year ARM averaged 3.14 percent. 

Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage.


Source:  http://www.thenichereport.com/

What are Mortgage Points?

When people want to find out how much their mortgages cost, lenders often give them quotes that include both loan rates and points.

What exactly is a point?

A point is a fee equal to 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent but come with a charge of 1 point, or $1,500.A lender can charge 1, 2 or more points. There are two kinds of points -- discount points and origination points.

Discount points: These are actually prepaid interest on the mortgage loan. The more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to lower their rates. This kind of point is tax-deductible.

Origination fee: This is charged by the lender to cover the costs of making the loan. The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs. The IRS specifically states that if the fee is for items that would normally be itemized on a settlement statement, such as notary fees, preparation costs and inspection fees, it is not deductible.
How do you decide whether to pay points, and how many? That depends on a number of factors, such as how much money you have available to put down at closing and how long you plan on staying in your house.Points as prepaid interest reduce the interest rate, an advantage if you plan to stay in your home for a while.
But if you need the lowest possible closing costs, choose the zero-point option on your loan program.

By the numbers ...

A lender might offer you a 30-year fixed mortgage of $165,000 at 6 percent interest with no points. The monthly mortgage principal and interest payment would be $989. If you pay 2 points at closing (that's $3,300) you can bring the interest rate down to 5.5 percent, with a monthly payment of $937. The savings difference would be $52 per month. But it would take 64 months to earn back the $3,300 spent upfront via lower payments. If you're sure you will own the house for more than five-and-a-half years, you save money by paying the points.

Fixed Rate Vs. Adjustable Rates - Which one is the best for me?

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary mortgage types. While the marketplace offers numerous varieties within these two categories, the first step when shopping for a mortgage is determining which of the two main loan types - the fixed-rate mortgage or the adjustable-rate mortgage - best suits your needs.

Fixed-Rate Mortgages
A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.

The partial amortization schedule below demonstrates the way in which the principal and interest payments vary over the life of the mortgage. In this example, the mortgage term is 30 years, the principal is $100,000 and the interest rate is 6%.

Payment	Principal	Interest	Principal Balance
1. $599.55	$99.55	$500.00	$99900.45
2. $599.55	$100.05	$499.50	$99800.40
3. $599.55	$100.55	$499.00	$99699.85

As you can see, the payments made during the initial years of a mortgage consist primarily of interest payments.
 
The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. Fixed-rate mortgages are easy to understand and vary little from lender to lender. The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable.
 
Although the rate of interest is fixed, the total amount of interest you'll pay depends on the mortgage term. Traditional lending institutions offer fixed-rate mortgages in a variety of terms, the most common of which are 30, 20 and 15 years.

The 30-year mortgage is the most popular choice because it offers the lowest monthly payment; however, the trade-off for that low payment is a significantly higher overall cost because the extra decade, or more, in the term is devoted primarily to paying interest. The monthly payments for shorter-term mortgages are higher so that the principal is repaid in a shorter time frame. Also, shorter-term mortgages offer a lower interest rate, which allows for a larger amount of principal repaid with each mortgage payment, so shorter-term mortgages cost significantly less overall.

Adjustable-Rate Mortgages
The interest rate for an adjustable-rate mortgage varies over time. The initial interest rate on an ARM is set below the market rate on a comparable fixed-rate loan, and then the rate rises as time goes on. If the ARM is held long enough, the interest rate will surpass the going rate for fixed-rate loans.
 
ARMs have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged frequency. The fixed-rate period can vary significantly - anywhere from one month to 10 years. Shorter adjustment periods generally carry lower initial interest rates.
 
ARM Terminology
ARMS are significantly more complicated than fixed-rate loans, so exploring the pros and cons requires an understanding of some basic terminology. Here are some concepts  borrowers need to know before selecting an ARM.

• Adjustment Frequency - This refers to the amount of time between interest-rate adjustments (e.g. monthly, yearly, etc.).
• Adjustment Indexes - Interest-rate adjustments are tied to a specific index, or benchmark, such as the interest rate on certificates of deposit or Treasury bills, or the LIBOR rate.
• Margin - When you sign your loan, you agree to pay a rate that is a certain percentage higher than the adjustment index. For example, your adjustable rate may be the rate of the one-year T-bill plus 2%. That extra 2% is called the margin. 
• Caps - This refers to the limit on the amount the interest rate can increase each adjustment period. Some ARMs also offer caps on the total monthly payment. These loans - known as negative amortization loans - keep payments low, however these payments may cover only a portion of the interest due. Unpaid interest becomes part of the principal. After years of paying the mortgage, your principal owed may be greater than the amount you initially borrowed.
• Ceiling - This is the highest interest rate that the adjustable rate is permitted to become during the life of the loan.

ARMs are attractive because they offer low initial payments, enable the borrower to qualify for a larger loan and in a falling interest rate environment, allow the borrower to enjoy lower interest rates (and lower mortgage payments) without the need to refinance. The ARM, however, can pose some significant downsides. With an ARM, your monthly payment may change frequently over the life of the loan. And if you take on a large loan, you could be in trouble when interest rates rise - some ARMs are structured so that interest rates can nearly double in just a few years.

Which Loan is Right for You?
When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace.  Individuals' personal finances often experience periods of advance and decline, interest rates rise and fall, and the strength of the economy waxes and wanes. To put your loan selection into the context of these factors, consider the following questions: 

• How large of a mortgage payment can you afford today?
• Could you still afford an ARM if interest rates rise?
• How long do you intend to live on the property?
• What direction are interest rates heading and do you anticipate that trend to continue?

An ARM may be an excellent choice if low payments in the near term are your primary requirement or if you don’t plan to live in the property long enough for the rates to rise. If interest rates are high and expected to fall, an ARM will ensure that you enjoy lower interest rates without the need to refinance. If interest rates are climbing or a steady, predictable payment is important to you, a fixed-rate mortgage may be the way to go.

Regardless of the loan that you select, choosing carefully will help you avoid costly mistakes.

Annual Percentage Rate (APR)

What Is the APR?

APR is a measure of the cost of credit that includes loan fees paid to the lender upfront, as well as the interest rate. The higher are the loan fees, the larger will be the APR relative to the rate. If there are no loan fees and the rate is fixed through the life of the loan, the APR will equal the rate.

What Is the Purpose of the APR?

To provide a single comprehensive measure of the cost of credit to the borrower, which they can use to compare loans of different types and features, and loans offered by different loan providers.

The APR is a mandated disclosure under Truth in Lending. Mortgage shoppers confront it as soon as they search for interest rate quotes, because the law requires that any rate quote must also show the APR.

Can All Borrowers Rely Safely on the APR?

No, some should ignore the APR, including:

* Borrowers who expect that they will sell their house or refinance the mortgage     within 7 years.
* Borrowers looking to raise cash, who are comparing the cost of a cash-out refinancing with the cost of a second mortgage.
* Borrowers with little cash who need a high-rate loan with negative points (rebates) to cover their costs.
* Borrowers shopping for a home equity line of credit (HELOC).

The APR is most useful for borrowers shopping for an adjustable rate mortgage (ARM), who expect to hold the mortgage a long time, and who are not doing a cash-out refinance, a low or no-cost mortgage, or a HELOC.

Mistakes to avoid when you are shopping for a Mortgage

Whether you are looking for a Mortgage for your First Home or refinancing your current loan, it is important to know the most important mistakes people make when they looking to get the best deal.

• Choose the loan provider that offers the best price and rate over the telephone, TV advertising or newspaper:  If you look at all of them, you will find a lot of lenders that will beat each other at several different prices, but not one of them have the capacity nor the intention to deliver those offers.  Their intention is to get you interested, move along with the process until it is too late for you to back out.  By then, they will raise the price using a lot of tricks available.  You want to make sure you are talking to a reputable lender and one that will deliver what they are promising.  In order to determine this, they will offer you either a Fee sheet or a Good Faith Estimate.  Now a days, lenders will not issue a Good Faith Estimate unless you have decided you are going to do the loan with them.  They are bound to the fees they quote in the Good Faith and if you are not serious about using them, or you do not have a property or do not know what loan program you are going to be using, it is hard to determine what the real fees will be as they depend on third party providers also, and different loans have different fees. Still before you sign a loan commitment or give them any application fees, you want to make sure you are talking to somebody that will deliver.  Usually application fees are non-refundable.

• Request quotes for rates without giving the lender all the information about your situation:  This might affect the price, the fees and the lender will not be able to give you an accurate quote.  You have to make sure you let them know what you are planning to purchase, type of home, occupancy type, down payment, loan size, equity in the property if you are refinancing, your ability to document your income and assets, etc.  Unless they are not given all the information, they will give you a quote assuming the standard specifications and will give you a low price, this might not be realistic for your situation.
•  Shop for your mortgage on different days:  Because of the market volatility this is a huge NO NO!!  This will not be comparable...Unless you are shopping all of them on the same day, this really is useless and you are wasting your time and energy.  Shop all of them on the same day.
• Confuse a No-Cost Mortgage with as a No-Cash Mortgage:  This is one of the worst mistakes a borrower can make. "No-cash" means the borrower does not have to pay the settlement costs at closing, but the lender doesn’t pay them either. The costs are added to the loan balance, so the borrower pays them over time, with interest.  Buyer usually pays a higher interest rate on a No-Cost mortgage as the costs are calculated and are put into the loan in the interest rate.  Depending on the closing costs, if the lender needs for example $3,000 for closing costs they will charge the borrower the rate that will give them $3,000 in rebate to cover those costs.  Really they is no such thing as free in the mortgage business... you will get charged somehow.

• Select a Lender without knowing any of the other charges except points, then try to negociate them afterwards:  Before you make a decision on whom you are going to use, find out all of their fees, I will write a post in regards to this but please, do make sure you know what you are getting yourself into.  Everything costs money, Title Insurance, Escrow, Credit Reports, Appraisals, Inspections, Flood Certifications, Recording Fees... just to name a few, so make sure you do know about these fees before signing any initial documentation.