Government Refinance Assistance

After increasing for much of April interest rates on government-backed mortgages have been decreasing again for a several weeks and are now approaching new lows for the calendar year. Interest rates tend to track the 10 year treasury note so recent decreases in 10 year treasury yields have translated into 30 year mortgage rates below 5% in the last couple of weeks. Mortgage interest rates are volatile though so there is no telling how long this current dip will last.

Here is a quote from a recent WSJ article on this topic:

The average rate on the 30-year mortgage matched its lowest level since mid-January this week, according to Freddie Mac’s weekly survey released Thursday. …

“Weaker economic data reports reduced Treasury bond yields and allowed mortgage rates to drift lower for the third consecutive week,” said Frank Nothaft, vice president and chief economist at Freddie Mac, in a news release. “For instance, real economic growth in the first quarter fell short of the market consensus forecast and represented the slowest pace since the second quarter of 2010. In addition, both the manufacturing and service sectors exhibited growth at a slower rate in April.”

If you have an interest rate that is higher than you want contact us in the sidebar to see which programs might apply to your family.

As the housing bubble was inflating in the mid 2000′s one of the often-abused mortgage types was the ARM or adjustable rate mortgage. As a result of that abuse ARM’s have gotten somewhat of a bad reputation among consumers. But when used correctly ARM’s can be excellent mortgages. That is why government agencies like the FHA and VA still offer ARM’s, as do quasi-government agencies Fannie Mae and Freddie Mac.

The appeal of ARM mortgages is that the rates can be significantly lower than 30 year fixed mortgages. For instance, in recent weeks rates on 5 year ARMs were in the mid threes. That is nearly 1.5% lower than the average 30 year fixed interest rate in the same time period.

When is an ARM appropriate? The most obvious answer is ARMs are great for people who plan to sell their homes in the next 10 years or less. It is not uncommon for someone to know they plan to sell their home in the next 3-5 years for various reasons like growing families, or wanting to downsize, or knowing a job related move is pending.

Here is an example:

Fictional Borrower Lisa has a $200k mortgage at a 6% interest rate and would like to take advantage of the historically low interest rates we are seeing lately by refinancing. Lisa plans to sell her home in the next 5 years or so. If she were to finance at 5% on a 30 year fixed mortgage her principal and interest payments (excluding escrow) should drop about $126 per month — from about $1200/month to about $1074/month. However if she were to refinance to a 5 year ARM at about 3.5% her principal and interest payments (excluding escrow) would drop about $211 per month — from about $1200/month to about $899/month. In her case the 5-year ARM rather than a 30-year fixed would add up to more than $1000 per year in additional savings and would be a better fit based on her plans to sell the home in about 5 years.

The main risk of getting an ARM is that if a borrower ends up owning the property after the ARM begins to reset the rates are likely to rise. So it is useful for borrowers to have some level of confidence that they are going to sell the home before choosing and ARM. In many cases ARMs can only increase 1% per year after the resetting begins, so there is some ramp up time, but in cases where borrowers don’t plan to sell the home it is usually wiser and less costly in the long run to just refinance into a 30 year fixed rate instead of an ARM. On the flip side, in cases where borrowers plan to sell in the next 5-10 years it doesn’t make a lot of sense to pay an extra premium for a 30 year fixed rate.

Contact us in the sidebar to learn more about the available programs.

The heads of Fannie Mae and Freddie Mac have recently indicated they are not high on the idea of principal write downs at all. This should come as no surprise to anyone. The problem with principal write-downs is that they are a Pandora’s Box for banks and investors. If lenders started forgiving principal for borrowers they would open a massive flood that could bury them. There are millions of underwater homeowners in the US. The majority of those homeowners are not willing to consider walking away from their homes. A foreclosure or short sale severely damages credit scores and that is something most borrowers would like to avoid. The banks benefit greatly from this fact. If banks and investors started offering principal write-downs they would certainly be overrun with requests and would have to deal with billions of losses that they currently are avoiding.

So while politicians like to make noise about principal reductions, banks and investors like Fannie and Freddie will continue to show zero interest in the concept in most cases.

However there are several refinance programs available that do help families. Contact us in the sidebar to learn more about those.

After slowly rising for more than four straight weeks interest rates on government-backed and conventional mortgages finally dipped again over the last week or so. The dip in rates is a welcome development to folks looking into refinancing. Rates on mortgages largely track the the yields on the 10 year treasury bond and with the recent dip in the stock market, yields on the 10-yr note have dropped as well. If you have been thinking about refinancing to a lower interest rate contact us in the sidebar right away to learn more about the programs available. Drops in interest rates sometimes don’t last long so now might be a good time to lock in a better rate than you currently have.