The Charleston Real Estate Search.com

Tap into low-interest home rates

Great article from the P&C

By David Slade
Sunday, January 16, 2011

Somewhere, there are people interested in buying a house to call their home.

Not a house to flip, rehab, rent or tear down, but to live in.

And somewhere in the land of existing homeowners, aside from the millions who owe more than their homes are worth, there are those with enough equity in their residences to refinance.

These people find themselves in a rare moment in history: house-hunting or refinancing amid the wreckage of a historic real estate meltdown. Tougher lending and credit standards have made it harder to buy, and the plunge in real estate prices has left many homeowners unable to refinance. But those who qualify can borrow money at the lowest interest rates in generations.

In both cases, the bottom-line math is fairly simple.

–Lower interest rates mean lower monthly payments, and a larger share of each payment goes toward reducing the debt rather than interest costs.

–A shorter loan term means higher monthly payments, but lower interest costs, and the loan gets paid down faster.

–A longer loan term means lower payments, but greater interest costs over the long-term.

The question for many buyers and refinancers is: Which way are interest rates heading?

On the financial pages there’s much debate, with the majority of experts calling for rates to rise.

Indeed, mortgage loan rates hit new lows in November, then bounced up a full percentage point by mid-December before easing again.

Here’s what that can mean: On a $200,000 30-year mortgage, the difference between a 4.5 percent and 5.5 percent rate is $123 a month. That’s worth $44,000 over the life of the loan. At the higher rate, the loan balance would be $2,600 higher after five years.

For anyone looking to refinance, lower payments and greater equity over time should be weighed against any upfront loan costs.

For potential buyers, low-interest rates are great, but what about the risk that home prices could continue to drop?

Before the bubble, homes were thought to appreciate slowly but steadily, usually keeping just ahead of inflation.

In the Charleston area, roughly speaking, homes worth $150,000 in 2001 were selling for $250,000 five years later, and they’re selling for $200,000 today. Adjusted for inflation, $150,000 in 2001 is worth about $185,000 today, so prices are getting closer to historic norms.

In my $200,000 loan example, the lower interest rate saves the borrower $7,380 in payments, and they gain an extra $2,600 in equity, over the first five years. Combined, that’s equal to more than 5 percent of the amount borrowed.

If the same borrower waited to buy, and the home price dropped by 5 percent while mortgage rates rose by one percentage point, they would end up making higher payments every month.

No one can say with certainty what will happen with either interest rates or home prices. But at this point the potential for rising rates should be a big consideration for anyone considering whether it’s time to buy a house.

One way to gain some peace of mind, and greatly reduce the risk of ever owing more than a home is worth, is to consider a 15-year or 20-year mortgage. The payments would be higher than a 30-year loan, but the interest rate would be lower, and you can build up equity more quickly.

Borrow $150,000 at 5 percent for 30 years, and at the end of five years (that’s 60 payments of $805, not including insurance and taxes), you’ll still owe $137,743.

Change the loan to 15 years at 4.25 percent and the payments increase to $1,128 monthly. But, in less than two years you’ll own more of the house than after five years with a 30-year loan. At the same time, the balance would be down to $110,157.

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What determines your interest rate?

If you’re in the market to buy, chances are you’ve been drooling over the unprecedented interest rate dips we’ve seen this month.  In an effort to entice more buyers to market, lenders are playing the limbo game with rates as  low as 3.5%.  But just because the bank advertises a specific rate doesn’t mean that’s always what you get.  To find out why, we went directly to our mortgage expert to find out.

Here’s what Joel Greer of Carolina One Mortgage had to say:

“Asking for today’s rate is like asking what are house prices doing today.  It’s such a general question, that the only correct answer is an average. It’s like a perfect world rate.  If all thirteen factors are perfect, then the given rate for a 30 year fixed written today is 4.25 – 4.5%.  However, it’s more important to know exactly what effects that rate.  Only then can you find the mortgage that’s best suited to your individual needs.”

Here are the most common factors that can effect the interest rate of any given borrower: (My translations are in red.)

Credit Score:         620 is the minimum to qualify for a mortgage, however you’ll want 720+ for the best rates! (For your free credit report, click here.)

Loan Term:        30, 20, 15 and 10 year terms are available. Typically the shorter the term, the better the rate (and the less interest you will pay in the long run.)

Loan Amount:        There tends to be adjustments for loans under $100,000 and over $250,000, but the severity of the adjustment is often tied to the credit score as well. 

Down Payment:        Typically the more money you put down, the better rate you can obtain. 

FHA or Conventional:        FHA tends to have a higher interest rate since it’s easier to qualify for, but if your credit scores are low, you may get a better interest rate with an FHA loan versus a heavily adjusted Conventional loan that can have big hits for low scores.  (Also, FHA loans allow for higher closing cost assistance from the seller.)

House or Condo:        There are added restrictions and interest rate adjustments for condominium purchases. Single Family residences tend to have the best rates associated with them. (Condo rates also depend on many other factors such as how many of the units are owner-occupied, HOA management issues, special assessments. etc.)

Lock Term:        The interest rate can be locked for 15,30,45 or 60 days. The longer the lock, the higher the rate. This difference is often very small, but it can be noticeable. 

Occupancy:        This is a big one. “Par” pricing is based on Primary Residences and 2nd Homes. Investment properties have big rate adjustments! 

 State:        Some products have small pricing adjustments based on the State the property is located in. 

Waiving Escrows:        Waiving your insurance and/or property tax escrows is considered risky for lenders. There is usually a small adjustment for not letting the bank be in charge of keeping both current. (In other words, if you choose to pay your own taxes and insurance rather than let the bank do it as part of your mortgage program, they will penalize you with a slightly higher rate because they risk losing 1st lien status behind the county if you default.)

 1 Unit or 2-4 Units:        Multiple unit properties have interest rate adjustments.  

 LPMI or Standard:        Some products have the option of Lender Paid Mortgage Insurance. This means you can have your interest rate adjusted to include what would usually be a monthly premium for your Private Mortgage Insurance. In some cases this is a great option, but it is coupled with your credit score and down payment. 

 Origination Fee or No fees:        The industry standard is to charge a 1% origination fee. This is usually how the Loan Officer gets paid (and the lending bank as well). This, and many other closing costs and fees, can be priced into the interest rate if funds to close are a concern. Whether you roll closing costs into the rate depends on your personal financial situation and how long you plan to own the property should be considered. The longer you plan to keep the property, the lower the interest rate you’ll want…therefore, with long term retention, you’ll want to pay your fees upfront and get the best rate possible. Conversely, if your intention is to sell in 2-3 years, the interest rate is less of a concern, and the minimum contribution of your own money is the goal.

Of course, it always pays to understand what affects your credit score.  For more information on that, read my article on credit scores.

To contact Joel about a new home loan or to refinance your existing mortgage, click on the mortgage tab above.

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