Mortgage rates you can live with
Mightily encouraged by current rock-bottom interest rates, the 15-year mortgage is gaining a higher profile. The traditional 30-year home loan is still far and away from the most popular vehicle, but not as handily as it once used to be. With the New Year beginning, the average rate for a 15-year mortgage was 2.64 percent with fees (also called points) at a modest .06 percent. This compares to 3.34 percent for the 30-year mortgage and fees of .07 percent, which are also at historic lows. By sobering contrast, in 1981, the interest rate on residential property reached a dizzying 18.45 percent, with points at 2.3 percent.
The 1-year adjustable-rate mortgage (ARM) is now at 2.57 percent with fees of 0.4 percent. Smart Money finance reporter AnnaMaria Andriotis advises that for an ARM to make sense, the borrower takes a gamble that interest rates will remain steady, or that the house can be sold before rates climb again. “It is a dicey bet,” she warns. ARMs lost their appeal during the boom when buyers who sought to “flip” their properties, hoping for quick profits, instead faced steeply falling values. Option ARMs became notorious because they allowed a borrower to make minimum payments that did not even cover the interest charges.
The realty sales market has moved steadily upwards for enough quarters to make the trend credible. Optimism has returned. Just after Christmas, the Wall Street Journal announced, “Home Prices Hit a Milestone: Growing Demand, Shrinking Supply Buoy Housing Market; Tide Has Changed.” And, “New Sign of Strong Housing Demand.” Headlines like that beg the question, “What are you waiting for?”
A refinancing boom
We are effectively in a refinance boom, according to SMR Research, a leader in providing lenders with industry and market research about consumer lines of business. And SMR predicts that, like all boom times, it will come to an end. When it does, “Mortgage and home equity loan production will change radically, and for a very long time.” They do not necessarily mean change for the better.
Paying off the mortgage in half the time has significant financial benefits, not least a substantial savings in interest payments over the life of the loan. When rates were higher, the 15-year option had limited appeal because monthly payments jumped. Children and tuition challenge the family budget, and increased amounts have no appeal, even if the long-term benefit is huge. But in the current market, low-interest rates permit some owners – especially those who have paid down their 30-year mortgage – to refinance the balance into a 15-year loan and pay about the same as before, or even less.
Other refinance options
Owners who do not have sufficient equity built up may also have a solution for obtaining a short-term loan. If Freddie Mac owns your mortgage and your payments are up-to-date, but you are unable to refinance because you have little or no equity in the home, you may still be able to refinance to a lower interest rate – or more stable mortgage – through the federal Home Affordable Refinance Program (HARP).
HARP is for homeowners who have not been able to refinance due to a decline in the value of their homes. Visit Freddie Mac’s Loan Lookup tool to see who owns your mortgage. HARP may help you obtain a monthly payment you can afford and must result in one or more of the following:
- A reduction in your interest rate and or your monthly principal and interest mortgage payment
- A fixed-rate mortgage in place of an adjustable-rate, interest-only, or balloon/reset mortgage
- A reduction in the term of your mortgage (e.g., from 30 years to 15 years)
FHA mortgage holders may be able to obtain a streamline refinance. If your loan is FHA insured, you might be able to have the interest rate lowered or an ARM converted to a fixed-rate loan.
Harry Langenberg is the Co-founder and Managing Partner of Optima Tax Relief. He has over 10 years of financial services experience, including investment banking for technology-based firms at Merrill Lynch & Co. in San Francisco, CA.