Yes, Virginia, There IS a Santa Bernanke!
Posted on | December 24, 2008 | 1 Comment
So, lenders are not apt to move as quickly or as far down on rates as purchasers of mortgages would like. But, if the Fed keeps the overnight rate low, the market will (eventually) prevail. Sometime in the coming months, banks will be eager to do business, and rates will soften as something resembling competition kicks in.
Anyone considering a new home purchase or refinancing a mortgage may benefit. So, how to take advantage?
Be Creditworthy.
This one is easy! Don’t have any late payments, defaults, judgments or employment gaps on your loan application. Of course, if you do, then it’s too late and you’re already screwed. One caveat: Many credit card companies have lowered credit limits on consumers that may have had pristine credit in the past. This could affect anyone. A lowered credit limit will actually lower available credit access, which in turn can lower a FICO score. Be aware of this to avoid surprises.
Be Thorough
Check with many lenders on rates. This is tougher than in the past. Even using popular mortgage comparison sites like bankrate.com is going to be more difficult, as there are less lenders publishing on those sites. But check anyway. Also, call your current bank and your current mortgage company (if refinancing). Another good site is Amerisave.com, but again, check with individual lenders.
Be Aggressive
Ask about fees, because there are more of them than there used to be. Question them all. Don’t just be willing to pay document fees, etc. — ask why you are paying them. Use one lender against another, pointing out when a competitor isn’t charging a fee. This will be harder in the past, and lenders may be less willing to waive their standard charges. But it doesn’t hurt to ask.
Be Inflexible
DON’T go for any exotic loans. Stick with a standard fixed rate with the lowest term you can reasonably stomach. This may not be an issue for anyone now. At last check in the author’s area, an Adjustable Rate Mortgage (ARM) was actually at a higher starting rate than a 30 year fixed! Maybe the banking community has finally learned something.
Be Realistic
This is the most important point. Look carefully at two key facets of this situation: how much will this new loan cost and how long will it take for the monthly “savings” per month to equal that cost – the so-called “break-even point.”
There are many reports in the news of loans as low as 4% — but the cost of those loans may be hefty and not worth the outlay. For instance, today on Amerisave.com there is a published rate for a 4.25% refinance mortgage (assumes greater than 20% equity in the home). On a 250,000 mortgage (assuming 30 year term left on an original 6% loan for 30 years), one could “save” 270 dollars a month. Wow! That’s half a car payment for many people.
Only one problem – this loan costs $13, 000.00 – which is…er…about half a car for many people! To put this in perspective, it would take 4 years to make back the initial outlay for that new loan.
An additional trap in this scenario is that most people forget to take into account the TERM (ie length) of their mortgage. Take this author’s personal situation. My current mortgage is a 30 year fixed rate – but I’ve been paying on my loan for almost 4 years. By refinancing into a new 30 year loan, I would get no closer time wise to paying off my loan – and I would start over with 30 years to go. This is a crucial point. If I refinanced my home, today, at the exact same interest rate my payment per month would actually decrease – because I’ve just increased the number of payments I have to make to pay off the loan.
Any serious look at refinancing should take into account not just decreases in payment per month, but INCREASES in loan balance (if the new mortgage fee is rolled in) and length of time until the mortgage is paid off. So don’t be fooled into looking only at the payment per month!
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One Response to “Yes, Virginia, There IS a Santa Bernanke!”
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December 25th, 2008 @ 1:55 pm
I guess the Fed is hedging its bets that lower interest rates will spur the housing market, which might spur the economy. If that happens, great. If not, I think problems might worsen for lenders.