Mortgage leads loans Rates

In case you haven’t noticed the mortgage market and the real estate market have been blazing a trail into the record books. Never before has there been such explosive, sustained growth of these two markets. The key factor here is that one seems to feed off the other. Is this a good thing, or are the two markets headed for a collapse?

You have analysts that will argue for either side. But, you need to have a better understanding of how this process works, and what elements have come together to allow this kind of growth, before you can accept or disprove either argument. What has happened to spur this kind of growth? Well, there are several key factors that managed to come together at precisely the right time, some of them attributable to natural disaster that has generated a booming market.

The first contributor was the falling interest rate that has leveled out around 6 – 7%; the second great contributor has been the increase in mortgage loan options. There are mortgage products out there to fit every type of buyer. The third contributor, (and this one is purely from nature) was the horrific hurricane seasons of the past couple of years, including the season we had this year.

How have all these elements come together to generate growth? Here’s exactly how: lower interest rates meant cheaper monthly payments, refinancing options were open, and people could afford to buy bigger homes for less. Add to that mix a more varied loan market, and you have an increase in buying, selling, and building. If you also throw in the fact that hurricanes destroyed massive quantities of homes along the coast, and most will rebuild, you have a burgeoning real estate and housing growth market.

We have also managed to create an environment very conducive to investment, construction, and resort development. Now, if you factor in a booming market for investors, you have a prime situation for increases in real estate value, increases in construction, and increases in mortgage loans.

How does the average citizen ready to buy or build a home interpret all this information? Well, it creates a wonderful situation for the homeowner looking to sell a home, simply because the value of the home should show a tremendous increase over the purchase value, especially if you’ve owned the home for more than 10 years. However, if you’re buying or building, you’re not going to like the situation. Why? Because home prices are up, thanks to the rising real estate prices, and so are is the price of building materials, needed to build a new home. We can attribute much of this to high gas prices and hurricanes. The good news, in all this, is the low interest rates. You can still borrow at an extremely affordable interest rate.

For the consumer shopping the market, you need to really educate yourself about the rising costs of real estate, the local values in your community, and what mortgage products would most benefit you, when you consider your individual objectives. If you’re like most, you aren’t buying your home for an investment, and you aren’t buying with the intent to sell in a few short years. In the market of today, it would be a wise choice to meet with a financial advisor; someone that has a background in finance, and can help you to clearly define your objects, and choose a mortgage that will reflect those objectives.

Many of the individuals, who are the doomsayers, seem to think that the market can’t sustain this type of growth. That is has occurred too quickly, and like the bubble of the stock market, will burst, leaving many homeowners and mortgage lenders “holding the bag” so to speak. But, you also have many of the intellectuals that say the real estate market was due a burst of growth; that it is normal, healthy, and we should have no trouble sustaining this type of growth. Whatever the end result, right now, the real estate market and the mortgage market are hot items; if you own real estate, you’ve hit the jackpot. If you’re looking to buy, get ready to pay.

In order to understand the theory behind the fixed rate mortgage, you have to understand the mindset of the mortgage banker and the mortgage borrower of thirty or forty years ago. The Great Depression left a tremendous impression on the minds of this country, so much so, that one of the popular mortgage products of the turn of the century, the interest only loan, was shelved, never to be heard from again. Not until the recent explosion in real estate prices and the mortgage industries efforts to accommodate home buyers of all types has there been such mortgage variety.

The trend after the depression, through post-war America, and really until the late 1990s was the fixed rate mortgage. That’s the type of mortgage the bank offered, and the public generally didn’t consider anything else. Why did so many individuals, as well as banking institutions popularize the fixed rate mortgage? This loan type, more than any other product available, was a security blanket for the banker, and the homeowner.

The banker, offering the mortgage loan, was assured of a 20% down payment and a secure monthly payment with a fixed interest rate that would benefit the bank. The homeowner received a set monthly payment amount that was affordable, and a fixed number of years to repay the loan, usually 20 or 30.

Since interest rates weren’t fluctuating then, as now, and real estate prices were fairly predictable, this was a win-win situation for everybody. Then came the extremely high interest rates of the 80s, and suddenly bankers were locked into mortgage with a fixed interest of only 7 or 8 percent. It is at this juncture that the lending institutions and the mortgage companies began to re-think the fixed rate mortgage. Maybe adjustable rate mortgages were better suited for such a fluctuating market; they could then reassess the interest rate if the rates skyrocketed. This wasn’t something the homeowner was in favor of using, but really what choice do you have? And usually, at some point, the rate will swing in the other direction. That’s exactly what happened during the late 90s and early part of 2000.

Since 2001, interest only loans, 125’s and ARMs have grown in popularity; on average, the interest only segment of the market is now around 30%. That’s an increase from 3% in 2001. The market has never before experienced the variety now available for mortgage products, but never before have we experienced the growth in real estate prices and lowered interest rates that we have seen in the last 5 years.

The beauty of all this growth, the fixed rate mortgage is like the little engine that could. It’s still around, still chugging up the hill, and still getting the job done. Statistically, many homeowners never payout their mortgage; they either sell their home or they refinance before the mortgage completes. This may be true, but for many of the homeowners I questioned, their home purchase was for the purpose of establishing a permanent residence, one in which to retire and live out their lives. That makes the good old standard 20 year Fixed Rate Mortgage look really good, even the 30 is still around (although not quite as appealing).
While there are places in this country that the real estate market has really boomed, and the real estate prices are soaring, there are still many that have not felt any effect, and for whom the appraisal prices of the 0s are still good today.

When you consider the trade-off for the adjusting interest rate, the flexibility of paying interest only, and the borrowing power of the 125, it’s hard to imagine that they are still homeowners who wish to use the fixed rate mortgage. That’s because, however you’re not looking at the entire picture. Many of these homeowners have experienced at least one job layoff. Many of the baby boomers that bought houses 10 or 15 years ago were getting ready for retirement, and many of the homeowners live on fixed budgets. The purpose in purchasing a home for the vast majority of these homeowners was to provide for themselves a secure, paid for place to live. These homeowners aren’t interest in how to invest the equity of their home, nor are they interested in the other options they could exercise when investing their mortgage payment elsewhere. They’re simple interested in paying for their home, and the fixed rate mortgage is the slow and steady payment that will accomplish this task.

You’ve found the home of your dreams, you’re pre-qualified for a loan, and everything looks absolutely rosy. At first. As you begin to traverse the actual home appraisal, the loan amortization, your down payment, and all the dots that must be connected in order to make the dream a reality, you suddenly realize that you may not be able to afford a payment on the Fixed Rate Mortgage plan. What other options are available? Well, there’s the Adjustable Rate Mortgage that is a close first cousin to the Fixed Rate mortgage, just a little riskier. What advantages does the Adjustable Rate Mortgage option offer, and what are they drawbacks, if any? This article examines the advantages and disadvantages, if any, of the Adjustable Rate Mortgage.

The Adjustable Rate Mortgage, or ARM, is a more affordable option for homeowners who have a fairly tight monthly budget, and who have a need for bigger house, lower payment. The typical ARM customer wishes to build equity in their home; however they need the lowest monthly payment possible, for a certain number of years. The homeowner this program most benefits is the individual who expects income increases to occur within a few short years, but also has an expanding family with a need for space.

An ARM works in this way: when you set up your mortgage on an ARM, the interest rate you have will only be set for a very short period of time, normally only 6,9, or 12 months. At the end of that period, the interest rate will be re-evaluated, and if the rates have increased based on the prime, your interest rate will also increase; once again, for a short, set period of time. The benefit derived from this type of loan, during today’s economy, is that the interest rates are at an all time low. That equates to big savings for current home buyers, and homeowners who refinance.

The disadvantage to this type of loan occurs when interest rates begin to rise. As the rate rises for the lending institution, it also rises for you, the homeowner. Today, there are spin-offs on the ARM base product, that allow homeowners to operate under an ARM for a specified number of years, and then the loan converts to a fixed rate mortgage. There are also the ARMs that offer an interest only option for a specific number of years, then it converts to a basic ARM for a specified number of years, and then you have the option to convert the ARM to an FRM. The home mortgage product market can be very confusing, and quite frustrating if you don’t take the time to fully research and understand your mortgage options.

Another great benefit to the ARM, when interest rates are low, is that it allows you to build equity faster than with a standard fixed rate mortgage. But if interest rates begin to rise, quickly, your opportunity for building equity quickly, is greatly diminished, because more of the payment is directed to the interest on the loan. If you fall into the category of the typical homeowner, ARMs aren’t as attractive as the fixed rate mortgage; but let’s face it the typical homeowner category seems to be shrinking.

There are so many options with the ARM basic model, that the ARM option loans have become more popular than just the basic ARM. The 3,5,7 and 10 year ARMs that offer interest only options for a set period of time, or that offer 1% interest for the first month, then there are the ARMs that offer interest only for 3,5,7, or 10 years, then a standard ARM is established, or a FRM is established.

The mortgage industry has made available so many mortgage choices, that it’s often very difficult for the average consumer to consider all the options and make the most wise choice, simply because you need a spreadsheet and calculator just to compare the options, never mind making a decision about the best options.

All in all, if you are buying a home, and your income level is expected to increase over the next 10 years, or your expenses are going to drastically decrease, you would probably benefit from the standard ARM that converts to a FRM. All the other complicated options still simply do not benefit the average homeowner today. Now, if you don’t happen to be average, and you have a financial advisor that can work with you closely, I’d recommend that you consider all those other options, but only with the assistance of a trained financial analyst. After all, your home is a purchase you definitely do not want put at risk.