Taking Advantage of Low Real Estate Interest Rates
Bank of America was one of several financial institutions to report having profits in April. And the recent increase of home refinance application as well as existing home sales, are also being pointed out as other signs the economy is moving slowly but surely towards recovery.
In the second week of April, President Obama made a statement encouraging home owners and potential buyers to take advantage of these record low interest rates. It was an argument aimed at convincing people that the stimulus plan is, in fact, working and that rather than hoard their money and wait for the crisis to pass, consumers should start taking advantage of the current conditions. So how can people start cashing in on this recent decrease in home interest rates? First, let’s take a look at the numbers.
The Real Interest Rate
In early May, the national average interest rate for a 30-year fixed home loan was 4.99, and 4.87 for a 15-year fixed. Not bad. Seeing such numbers, a potential home buyer or home owner looking to refinance might be tempted to sign up for a plan while the good times last.
But before you jump ahead with a home purchase or refinance, there a few things you should know about. First off, any table showing average interest rates is not necessarily indicative of the rates in your area. For instance, banks have increased rates in states or areas particularly hard hit by the housing and foreclosure crisis to protect themselves from future losses, Furthermore, an interest rate advertised online is usually for the most qualified customer – you will have to complete an application before a broker would have enough information on your credit, your financial situation, and your property to realistically determine if you would qualify for a particular rate.
Rather than shopping around for the lowest advertised rate, make sure to choose a good mortgage loan origination service. The best way to secure the most beneficial deal for you is to work with an experienced broker who knows the business well. As the popular saying goes, shop the broker not the rate.
Why use a broker and not go directly to the bank?
This is a common question. Mortgage brokers are approved to send loans to a number of different banks, where if you go to a loan officer, they can only offer you products specifically from that bank. Oftentimes banks will specialize in a particular product or service niche, such as second home loans or quick underwriting turn time – so you can see how partnering with someone who is approved to offer products from a number of different banks can work to your advantage. On the other hand, loan officers can offer lower rates directly through their bank than through a third party – although this is not always the case.
Is now the time to purchase?
Decreasing home values have led to dramatic increases in home affordability, meaning, more people are now able to afford a home. In many areas, it is becoming cheaper to own a home than to rent a home. Once you add in historically low interest rates and tax credits as high as $18,000, now might very well be the time to pull the trigger and take advantage of the best buyer’s market in years.
Many people don’t bother to apply for home loans because they think they can’t qualify. This is unfortunate because there are programs out there, such as FHA and VA, where qualified borrowers can get 100% of their purchase financed. In addition, some lenders understand that you are more than just your FICO credit score and will take your credit behavior into consideration – so don’t discourage yourself from applying just because you may have had credit issues in your past.
Adjustable Rates
An adjustable rate mortgage is a loan program where payments stay fixed for a set amount of time, and then change based on the market after a specific period of time. In the past, adjustable rate mortgages made sense because they were significantly cheaper than fixed rate programs – so borrowers who knew they would not be in their home long term were able to take of lower payments during the initial fixed period. These days, adjustable rate loans are not commonly issued as fixed rate programs are the same rate or lower than adjustable rate programs.
There has been a significant amount of business recently from those who elected for adjustable rate loans in the past several years, and who have experienced or are about to experience a rate adjustment. If you are a home owner who is already in an adjustable rate program, consider taking advantage of the low fixed interest rates by securing a good 30-year fixed rate propgram. Once again, make sure to shop for a good broker.
Refinancing
Refinancing is a great way to ease the pressure of your monthly payments. With the current low interest rates, refinancing can leave you not only with lower payments, but a strong long term mortgage strategy.
When you contact your lender to refinance, make sure to do your research first. Look online for the current mortgage rates and comparable plans. Websites like e-loan.com and bankrate.com are good for this. Many lenders or mortgage brokers will also be willing to reduce or waive many of the closing costs of refinancing, so make sure to do some research on these as well.
The best advice you will get from any financial service expert, though, is that you should not go into a purchase or refinance if you don’t think your current financial situation can handle it. Adding more debt through refinancing or by taking out a home equity loan will alleviate immediate financial pressure, but it will be bad for your bank account (and potentially your credit) in the long-run. While the stimulus plan has put into effect some policies that will probably help a lot of home owners and potential buyers, it is the buyers and owners’ responsibility to take advantage of improved lending conditions in a responsible manner.