Mortgage interest rates, near all-time lows, are likely to remain attractive throughout 2012. That means opportunities for new homebuyers and for homeowners who want to refinance.
Here are five reasons why you might want to get a new mortgage, and what you should know.
While depressed housing prices and low mortgage rates have made homes more affordable, economic uncertainty and volatile housing markets have discouraged so many homebuyers that mortgage purchase applications dropped to a 15-year low in August, the Mortgage Bankers Association reported.
In qualifying for loans, buyers face hurdles including a down payment and the ability to document at least two years of income, says Justin Lopatin, vice president of Baytree National Bank & Trust in Chicago. Income documentation can be hard for people who’ve suffered temporary unemployment, are self-employed or have irregular wages.
Many investors pay cash to purchase residential rental properties. But some take out a mortgage to increase their leverage, says Julie Miller, sales manager at Prospect Mortgage in Irvine, Calif.
Lopatin says low interest rates are an inducement for investment property buyers.
“If you can take out an investment loan at 4.5 percent and rent out (the property) and make a few dollars a month, annually, the return will be worth the loan,” he says. “Not to mention the tax write-offs and other advantages of owning real estate.”
Mortgage insurance isn’t an option for investment property, so a fat down payment, typically 20 percent or more, is a must.
Investment buyers also need to show that they have enough income and reserves to afford the payments even if the tenant fails to pay the rent or moves out. Lenders typically will count 75 percent of the rent toward the borrower’s income-qualifying ratios, Lopatin says. For example, a monthly rent of $1,000 would count as $750 of income.
Low rates can make rate-and-term refinancing a smart financial move. This type of new loan is exactly what the name implies: a refinance in which the interest rate or term is changed, but the loan amount stays the same.
Another benefit might be locking in a fixed interest rate instead of an adjustable rate.
Homeowners who want to refinance must provide income documentation and have a “decent” credit score, to use Miller’s characterization.
Equity is also required for most loan refinance programs. This hurdle can be troublesome because homeowners don’t control a property’s market value, Lopatin says.
If your loan amount exceeds your home’s value, consider the Home Affordable Refinance Program, or HARP, part of the federal government’s Making Home Affordable initiative. If your loan is insured by the Federal Housing Administration, the FHA Short Refi program might enable you to refinance in a negative equity position.
A home equity loan or line of credit can be a good way to get cash for financial needs such as remodeling, major home repairs or financing a college education. The benefits, Lopatin says, include immediate cash, low-cost debt and potentially an income tax write-off.
There’s a catch: You can’t borrow against your equity if your mortgage debt exceeds your home’s value.
Taking out cash isn’t free money. In fact, a cash-out refinance increases your debt, which is “just not wise today,” says Alfred McIntosh, principal of McIntosh Capital Advisors, a financial planning firm in Los Angeles.
Co-signing a home loan for someone might sound like a feel-good proposition. But those warm fuzzies are the only benefit to co-signing.
“I see no reason why anyone should co-sign on anything for anyone, unless it’s a relative, because you’re putting yourself in a position to jeopardize your credit,” Lopatin says.
Miller sees “more negatives than positives” because the co-signer is equally responsible for the loan. If the borrower fails to make payments, the co-signer is on the hook.
Mortgage rates fell this week, reaching new record lows as investors seemed to ignore the latest signs of economic recovery.
The 30-year fixed-rate mortgage fell 3 basis points to 4.18 percent. A basis point is one-hundredth of 1 percentage point.
The 15-year fixed-rate fell 4 basis points to 3.4 percent. The average rate for 30-year jumbo mortgages, or generally for those of more than $417,000, fell 2 basis points to 4.62 percent.
The 5/1 ARM fell 1 basis point to 3.19 percent. With a 5/1 ARM, the rate is fixed for five years and adjusted annually thereafter.