Will Interest rates drop to 4.5%?

Could mortgage interest rates drop to under 5% or even as low as 4.5%?

Chances are that mortgage interest rates will drop dramatically in the first few months of 2009.

In a December 4th report on ABC news, anchor Charlie Gibson was joined by economic reporter Betsy Stark. Ms. Stark brought news of a plan being considered by the Treasury Department to drastically cut interest rates to stimulate the nation’s ailing economy.

Below are some distressing economic statistics:

· The National Bureau of Economic Research recently announced the U.S. has been in recession since December 2007.

· The Institute for Supply Management reported the index of manufacturing activity for November 2008 was the lowest since May 1982.

· In early December 2008, the Commerce Department reported October numbers for factory orders dropped 5.1%, the largest decrease since July 2000.

· There are more than 4.6 million homes for sale in today’s declining real estate market.

· In 20 of the nation’s major cities, home prices have dropped for the last 21 months in a row.

Economists believe that home sales are a major contributor to the nation’s economic health. If this is the case, bringing home sales back up should go a long way in repairing our struggling economy.

Home sales historically increase when interest rates are low. So the government is doing its part.

In the week prior to the report, the government injected $600 billion into the nation’s mortgage financing system. The cash was intended to bring mortgage rates down and boost home sales.

The move helped.

Mortgage rates have steadily dropped since then and are averaging in the low to mid 5’s. Mortgage applications increased as well—up 112%. More than half of the applications were from homeowners hoping to re-finance. The lower rates are helping some strapped home owners stay in their homes.

Professor Kenneth Rogoff, Economist, agrees that the best way to get the economy off life-support is to aid homeowners.

Home ownership has historically represented the American dream. Until the collapse, buying a home was thought to be one of life’s safest investments. Consumers must now be convinced that a home is a sound investment for their hard earned money.

Professor Chris Mayer of Columbia University’s School of Business says his research suggests that 1.5 million to 2.5 million buyers would enter the market if rates on new home purchases drop to 4.5%.

The Treasury Department is considering a plan to drop interest rates into the mid 4’s. Economists agree that a significant drop in interest rates would be a great help in luring nervous and hesitant buyers back into the market.

However, any plan to drive rates lower will likely not be implemented until the new president takes office.

What is Down Payment Assistance?

What is Down Payment Assistance (DPA)? In simplest terms, Down Payment Assistance is a method of mortgage financing through FHA (Federal Housing Authority) which helps home buyers save out of pocket expenses. Many home buyers have adequate credit to qualify for a home loan, but do not have the cash to cover the combined expenses of closing costs and down payment. Average closing costs on a $175,000 conventional loan are approximately $6000 (including loan costs and establishing escrow accounts). The minimum down payment required is 10%. On a home with a purchase price of $175,000, the 10% down payment comes to $17,500. Adding to that the closing costs of $6000, a buyer of a $175,000 home would have out of pocket expenses of $23,500. Not many Americans have access to that kind of cash.

The FHA used to offer loan programs which allowed the seller of the home to surrender part of the purchase price back to the buyer in order to help the buyer with his out of pocket expenses. The seller could surrender enough cash back to the buyer to cover loan expenses, down payment, and all fees. This type of assistance allowed the buyer to purchase the home without having to pay any money out of his pocket. This program has been discontinued due to the overwhelming number of foreclosures on loans made under this type of down payment assistance. Because the buyers who used this program had no funds of their own invested, they stood to suffer no financial loss upon foreclosure. One big motivation to keep up mortgage payments is to avoid losing one’s investment. These buyers did not have that motivation.

Furthermore, sellers would inflate the price of the home in order to cover the assistance. For example, if the seller wanted $175,000 for their home, they would agree with the buyer to add the costs of the loan, down payment and fees onto the price of the house. That way, the seller wasn’t really losing anything by assisting the buyer with is expenses. This gave the appearance that home prices were increasing, and they were, but the increase was not benefiting the sellers of homes. The increase was making the banks richer, and giving a false sense of security that the economy was growing. This false sense of security has helped put our economy in the mess it is in today. This particular program should never have been made available. It allowed too many people to buy homes who did not have the financial ability to buy. Now the entire economy is paying the price.

Down payment assistance programs do still exist, however, the assistance cannot come from a party who is involved in the transaction. In other words, the seller can no longer assist the buyer. However, almost all loan programs will allow assistance in the form of gifts from outside parties. In other words, family or friends can submit a letter to the lender stating that the money the buyer is receiving is a gift. However, anyone wanting to help the buyer needs to be informed that helping a buyer financially involves more than just writing a check. The giver will have to submit documentation that the funds are from a legitimate source. Documentation can be troublesome to acquire, and will have to be acquired by the giver himself. Adequate documentation must be in the form of authorized bank statements, broker statements, etc. The loan officer will instruct the giver in how to provide adequate documentation.

What Does a Short Sale have to do with the Mortgage Relief Act?

Selling your home through a Short sale and the mortgage relief act

Investors make a lot of money buying up foreclosed homes. Recently though, the trend is the “short sale”. A short sale can actually save a homeowner from going through the painful process of foreclosure. A short sale can sometimes even save the homeowner from having to pay out money when they sell.

In a short sale, the homeowner (or his representative) approaches the lender with an offer in hand from a buyer who will purchase the property for less than the amount owed by the homeowner. This may sound like something that the lender would not accept, but lenders are overwhelmed with foreclosed accounts on their books, which is bad for business. Foreclosing on a property is not cheap for the lender. There are legal fees involved, marketing fees to sell the property, real estate fees, etc. –not to mention the time involved for the lender to foreclose and then wait for the house to sell. If the lender is approached with a chance to get that bad loan off of their books, they often will accept the offer— even if the offer is as little as half the amount owed by the homeowner.

For example, Mr. and Mrs. Smith are behind on their payments and facing foreclosure. They owe $150,000 to the lender. The Smiths contact a short sale investment company for help. The company puts them in touch with an investor who offers $80,000 cash for the house and can close the deal in two weeks. The offer is submitted to the lender. The lender has to decide between the bird in the hand ($80,000 of quick cash), or two in the bush (a long costly foreclosure procedure in which the lender may not get much more than $80,000 anyway). If the lender takes the $80,000 offer, the remaining $70,000 owed by the Smiths is forgiven. The win for the lender is that they are saved the trouble of a lengthy expensive foreclosure process, and the Smith’s bad loan account is taken off the lender’s books. The win for the Smiths is that they are off the hook for the mortgage, and they have avoided a foreclosure on their credit.

There used to be laws that would require the Smiths to pay taxes on the $70,000 that the lender had to forgive. Mortgage forgiveness was considered income by the IRS. However, congress passed the “Mortgage Relief Act” abolishing the mortgage forgiveness tax.

Rather than forgiving the $70,000 shortage, the bank will usually try to arrange for the homeowner to pay back some, or all, of the shortage. If the homeowner pays the shortage, he can save his credit. The lender will offer to set up a repayment schedule for the homeowner. One friend of ours went through a divorce and sold his home through a short sale. He jokes that he will be paying the bank $100 a month for the rest of his life to make up for the shortage. Our friend wanted to do as much as possible to save his credit. His good credit is worth $100 a month to him.

Tips to Stop Foreclosure

Stop Foreclosure

If you do not know that America is in a mortgage crisis, you must have been hiding under a rock for the past year. There are record numbers of homeowners falling behind on their house payments. Getting too far behind, 90 days behind to be exact, will mean facing foreclosure. Stress builds as families go through losing their homes and their dreams. But there are ways to stop foreclosure:

Refinance

This is the easiest and usually the cheapest way to avoid foreclosure. If you are already a couple of months behind on your mortgage and worried that you may go further behind, check into refinancing. If you can get a lower interest rate that will reduce your payment enough to make it affordable, that is the best way to go. It will not affect your credit, and the costs to refinance can usually be added onto your new loan. It only costs around $1,500 to refinance a mortgage. If you get an estimate for much more than that, shop around. You do not have to refinance with your current lender.

TRY TO NEGOTIATE A RE-WORK (MODIFICATION) OF YOUR MORTGAGE

Lenders are becoming more and more reasonable about granting loan re-works, also called a loan modification. The goal of loan modification is to reduce the monthly payment enough to make it affordable for the homeowner. Here are the different features of a mortgage that can be renegotiated with your lender during loan modification:

• If you have a high interest rate (higher than 7.5%), you may be able to negotiate a lower rate. A lower interest rate means a lower mortgage payment.

• You may be able to negotiate a decrease in your loan amount if you owe more than your house is worth. Lowering the loan amount will also mean a lower mortgage payment.

• You may be able to extend the term (the length of time) of your mortgage. If you spread your payments out over a longer period of time, of course, that means the payments will be less.

MAKE SURE YOU TALK TO THE RIGHT PERSON

Borrowers often call their lenders and assume that whoever answers the phone can assist them. Sheryl M. was three months behind on her mortgage and was facing foreclosure. She was able to scrape together enough money to make one and a half payments. She thought that would help get her back on track, so she called her lender. The person who answered the phone told her that it was too late for her to try and catch up on her payments because foreclosure proceedings had already started. If Sheryl had asked for the “re-work department” or the “loss mitigation department,” she probably would have gotten a different answer. If you call your lender about making partial payments, ask for the loss mitigation department, also called the re-work department or the loan modification department, and then ask to speak to the vice-president. He will probably have to call you back, but he is the one that will make the decision about what the lender can do to work things out with you.

DON’T MAKE UP SOB STORIES.

just be honest about your circumstances. The fear of losing your home can make it tempting to say things that are not accurate. But most of the time, the lender will find out the truth anyway. If you are caught in a falsehood, the lender will not want to work with you. Be honest and cooperative.

SHORT SALE

This is a quick sale to a buyer at a decreased price. The reason it is called a “short sale” is because there is a deadline by which the home must be sold. When a foreclosure letter is delivered to a homeowner, a date is given when the house will be auctioned off on the court house steps. If the property sells before that date, the homeowner will probably take a loss, but will at least be able to salvage his credit by avoiding foreclosure. The seller and the lender have to work out the details if the offer is less than the amount needed to pay off the mortgage. Sometimes the bank will assume part of the loss. The seller must assume the rest.
For example, if a homeowner owes $200,000 on his home, but the best offer on the house is $175,000, there will be an amount still owed of $25,000.

The bank may agree to write off $10,000 as a loss but will expect the seller to pay the remaining $15,000.

Most often, if there is a shortage, the seller doesn’t have the money to cover it, so the bank will work out a payment schedule.

Mike G., a friend of my husband’s, said he still owed a large amount of money after he worked a short sale on his home. He told my husband he would be paying the bank $100 a month for the rest of his life. He was probably exaggerating, but the point is that the bank will work to get as much as possible out of the deal.

Mike felt it was worth paying $100 a month to save his credit.

The Mortgage Crisis, Home Values, and Responsible Borrowers

Mortgage Crisis – Responsible borrowers are suffering too.

With all the news about the mortgage bail out lately, it is common knowledge that the problem began when loans were given to people who never could afford them in the first place.

Down payment assistance programs, interest only loans, variable rate loans with escalating payments all went into the pot to make the witches brew that poisoned the economy and set Wall Street reeling.

But what about responsible borrowers? Even though responsible borowers can take some solace in knowing they made the right decision in not borrowing money they could not repay, they are still suffering the fallout and paying for other peoples mistakes.

Foreclosures are pushing property values down.

People who are trying to sell their homes are competing with other homes being marketed at foreclosure prices. In addition to a competitive market place for selling a home, real estate and home prices are largely determined by something realtors call a CMA, which stands for Comparative Market Analysis.

In simple terms, realtors access tax records to determine what comparable homes in the neighborhood have sold for recently. When there are numerous foreclosures that sell at below market prices, it lowers the value of nearby homes and home prices go down.

Foreclosed homes also hurt the community in other ways because on foreclosed homes, no taxes are being paid.

Revenues that normally go to support police and fire departments and other community services and that are necessary for a functioning healthy community are just not coming in like they do in a healthy economy.

We are all in this mess together. Everyone has skin in the game.

Short Sale – complex situation simple definition

Investors used to make a lot of money buying up foreclosed homes.

Recently, the trend is the “short sale”. A short sale can actually save a homeowner from going through the painful process of foreclosure.

A short sale can sometimes even save the homeowner from having to pay out money when selling.

The homeowner (or his representative) approaches the lender with an offer in hand from a buyer who will purchase the property for less than the amount owed by the homeowner. This may sound like something that the lender would not accept, but lenders are overwhelmed with foreclosed accounts on their books, which is bad for business. Foreclosing on a property is not cheap for the lender.

There are legal fees involved, marketing fees to sell the property, real estate fees, etc. –not to mention the time involved for the lender to foreclose and then wait for the house to sell.

If the lender is approached with a chance to get that bad loan off of their books, they often will accept the offer— even if the offer is as little as half the amount owed by the homeowner.

For example, Mr. and Mrs. Smith are behind on their payments and facing foreclosure. They owe $150,000 to the lender. The Smiths contact a short sale investment company for help. The company puts them in touch with an investor who offers $80,000 cash for the house and can close the deal in two weeks. The offer is submitted to the lender. The lender has to decide between the bird in the hand ($80,000 of quick cash), or two in the bush (a long costly foreclosure procedure in which the lender may not get much more than $80,000 anyway). If the lender takes the $80,000 offer, the remaining $70,000 owed by the Smiths is forgiven. The win for the lender is that they are saved the trouble of a lengthy expensive foreclosure process, and the Smith’s bad loan account is taken off the lender’s books. The win for the Smiths is that they are off the hook for the mortgage, and they have avoided a foreclosure on their credit.

There used to be laws that would require the Smiths to pay taxes on the $70,000 that the lender had to forgive. Mortgage forgiveness was considered income by the IRS. However, congress passed the “Mortgage Relief Act” abolishing the mortgage forgiveness tax.

Rather than forgiving the $70,000 shortage, the bank will usually try to arrange for the homeowner to pay back some, or all, of the shortage. If the homeowner pays the shortage, he can save his credit. The lender will offer to set up a repayment schedule for the homeowner. One friend of ours went through a divorce and sold his home through a short sale. He jokes that he will be paying the bank $100 a month for the rest of his life to make up for the shortage. Our friend wanted to do as much as possible to save his credit. His good credit is worth $100 a month to him.

Option ARM Loans Exposed

In the video, reporter Maureen Kelly suggests that Option A.R.M. loans are OK for some folks. I disagree. These are bad loans—expensive, complicated, and loaded with hidden fees. If you don’t know the right questions to ask, or if you have an unscrupulous smooth talking loan officer, you may find yourself in a mess soon after you move in to your new home.

Don’t be fooled by “low introductory rates”.

Introductory means temporary.

Your low payments will only last for one to five years. And you are not saving any money by paying the low rate because you are only making partial payments during the introductory period. The part that you do not pay is added onto your principal. The bank is only deferring (putting off) your payments. Eventually, you will pay every penny.

After the introductory period is over, you will have to pay the full payment. In the video, the introductory payment is a low $1,108 per month—very affordable. But when the option period expires, the payment more than doubles to $2,875 per month. The new, higher payment is probably out of reach for someone who was comfortable paying $1,108. Most of the time, this situation spells f-o-r-e-c-l-o-s-u-r-e.

Banks will do their best to make their money. They are not concerned about you over extending yourself. Be sure to educate yourself and ask the right questions, such as:

1. How long is the option period?

2. What will my interest rate be once the option expires?

3. What will my monthly payments be once the option expires?

4. What will my principal balance be when the option expires?

5. Once the introductory (option) period is over, will any part of my payments go to reduce my principal, or is this an interest only loan?

6. Is there a pre-payment penalty?

In the video, Maureen explains how you end up owing more than you originally borrowed to purchase the home.

If housing values do not grow while you are living in the home, you can end up owing more than your house is worth.

If you have to sell within the first 10 years, you will probably take a loss, which means you will owe money at closing just to get out from under your mortgage.

You are supposed to MAKE money when you sell a home, not pay out! Can you imagine having to write a check to SELL your house. It is happening more and more. Don’t let it happen to you.

Most people are better off renting than getting into an Option A.R.M. loan.