Financial Planning for September 2012

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Mortgage Opportunities Abound in Today's Market

By early summer of this year, 30-year fixed mortgage rates had fallen to 3.55 percent – their lowest level in 40 years. One of the reasons rates have remained low is that investors continue to pour money into relatively safe Treasury bonds – the securities that guide home loans.

Up until recently, low mortgage rates weren’t as meaningful because the real mortgage rate had increased significantly. The RMR is the rate at which home prices are increasing higher than mortgage rates. It is calculated by subtracting the rate of a home’s appreciation or depreciation from the nominal mortgage rate. Ideally, you’d like your RMR to be in negative territory. For example, a 3.5 percent mortgage rate minus an 8 percent appreciation rate gives you a negative 4.5 percent real mortgage rate. That’s why no matter how low mortgage rates go, it doesn’t make sense to purchase real estate while prices are still dropping because you lose equity even as you close the deal.

However, a recent report from Zillow concludes that residential real estate has turned the proverbial corner and prices are poised to rise. Now that home prices are rebounding, the RMR is back in negative territory. This puts home buyers in the unique position to buy property while mortgage rates and prices are still low.

This favorable scenario, combined with new mortgage products designed to help bolster the industry, creates a good opportunity to buy or refinance for a better positioned mortgage down the road.

Assumable Mortgage

An assumable mortgage allows a buyer to assume the mortgage of the seller with the exact same terms. The buyer must go through the same application process in order to be approved by the lender to assume the balance of the mortgage with the same interest rate, payment schedule and remaining term at closing.

The reason an assumable mortgage is becoming more popular now is because interest rates are historically low. As they begin to rise, you will be able to offer your home for sale at today’s currently low rates, which will make your home more attractive than others on the market. Note that loans backed by the Federal Housing Authority are typically assumable for fixed-rate mortgages but not variable-rate mortgages and home equity lines of credit. Also be aware that if you are behind on payments, your lender’s agreement might disallow your assumable loan to be assigned to a new buyer.

Shorter-Term Mortgages

The Great Recession and its ensuing layoffs, salary freezes and market volatility have set many Baby Boomers back in their retirement savings plans. Refinancing can provide the opportunity to replace a current loan with a shorter-term mortgage so you can lower your interest rate and pay off your mortgage faster. In 2011, 34 percent of refinancers chose to replace their 30-year fixed-rate loan with a 15- or 20-year loan.

Rates on a 15-year loan are about one-quarter to one-half percent less than a 30-year term, but the savings can be dramatic. For example, refinancing a $100,000 mortgage to a 15-year term at a 3.75 percent rate would yield about $30,000 in interest savings compared to a 30-year loan. Plus, you can pay off the mortgage in half the time.

Customized Terms

To accommodate more recent demand for shorter-term mortgages, some lenders will allow you to choose the term you’d like for a mortgage, typically anywhere between 8 to 30 years. Especially for pre-retirees, this is a good opportunity to set your term to the date you want to retire – ensuring you’ll be mortgage-free at that time. It also allows homeowners to take advantage of today’s lower mortgage rates and lower home prices without having to assume another 15- or 30-year loan. A custom term positions you to pay off the new mortgage in the same time frame as your original mortgage.


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