The mortgage rates have tumbled to record lows according to Freddie Mac. The efforts from the government to boost the economy does not seem to have the necessary efficacy to contain the fall of the mortgage rates.

The lower mortgage rates however inspire people to buy homes or to invest in the existing ones which helps the economy. A frenzied home buying also raises the price of the homes on sale. This tug of war continues until the forces stabilize which may not happen soon given other factors like lack of sufficient jobs that can bolster enough economic activity to encourage the home buyers sitting on the fence to jump in.

As of September 9, 2011, the 30 year fixed rate mortgage averaged 4.12%. The five year adjustable rate mortgage ARM continues to hover around 2.95%.

A home also can need a lot of cash for sudden repairs or even a replacement. For example, if the home catches fire, or becomes a victim of a natural disaster like a
tornado or a hurricane, a home owner would need a lot of money to restore the home back to it’s useful state.

Why Is Home Insurance Necessary?

If you still owe money to the bank as part of the mortgage or home equity line of credit, the bank would like to ensure that it would be able to recoup it’s money even if the whole home is wiped off by a natural or man made disaster.

In order to meet the above conditions, it is necessary to buy home insurance. The bank would need a continuously maintained home insurance for the duration till you owe any money to the bank. Without having a home insurance policy, any sudden expense on the home may either leave you bankrupt or leave you in a dire financial mess unless you are rich enough to absorb the extra expense without any pain.

Therefore it in not only important but also mandatory in most cases to buy home insurance.

Bank of America Settles Claims

As one of largest perpetrators of malpractice, Countrywide issued home mortgages to people who could not afford to pay back. BoA was sued by the investors who bought the securities backed by Countrywide.

It seems that it is only a matter of time before other big banks will have to settle with investors who bought their securities. Since Bank of America was responsible for almost a fifth of all the bad loans issued, it is the first one to come out and settle claims so that it can move forward keeping in mind the lessons it learned from it’s acquisitions and actions.

It is important to note that since you have been making payments for the last 12 years, you must have built some equity in the house. Therefore if you go for a 15 year fixed rate mortgage you might still have your monthly mortgage payment less than what you might be paying just now besides paying off the mortgage completely 15 years earlier! This means depending on the size of the mortgage you would save hundreds of thousands of dollars just as interest!

On the other hand, If you go with a 30 years fixed rate mortgage your monthly payment would be much small. This means you can voluntarily pay extra mortgage every month and still pay off in 15 years or less depending on how aggressive you can be. Unfortunately, many people cannot pay off extra voluntarily and therefore end up paying only the minimum required. This in turn means paying the interest for another 15 years besides not becoming debt free sooner!

Therefore, as a responsible citizen, it is a great question to ask: how much home can I afford? By asking this you also do a favor to yourself and your family by not falling into a debt trap that you might not be able to escape from without declaring bankruptcy.

As a thumb rule, you should not have your monthly mortgage payment more than a third of your after tax earnings.

It also does not make sense to put all your savings in buying a house just to lower your monthly payments. It is important to keep a safe financial buffer just in case you need money in the future for a rainy day.

How Much Can I Afford For A House?

If you have a nice income and not many regular expenses to take care of, you should figure out how long would you be in such a situation. For example if you have just started earning at the age of 21, you might be thinking you could afford to put at least fifty percent of your income against a mortgage payment. However, since the mortgage payments often last for 15 or 30 years, your capacity to make monthly payments would change. Obviously you do not need plan for all 30 years right away but keeping at least the next 3-5 years in mind is very important if you think your situation will remain more or less the same.

The best way to have your dream home affordable for you is to start with a small home and build some equity in it while saving even more on the sides. When you have enough equity and savings that you can use as a downpayment for a much bigger house, you can sell off your smaller home and buy the one you dream of. If needed, this process can be broken into even smaller steps.

In a nutshell, keeping your monthly mortgage payment to about a third of your monthly income has proven to be an effective strategy historically. There is little doubt that this time tested method will work in the future too.

When WIll The Home Prices Go Up?

The positive trend in the home prices was reported for most parts of the nation. Amongst the biggest gainers were Washington DC and Atlanta.

After a brief recovery in the home prices, a second “dip” in the new home market was considered inevitable and the fears turned out to be true. Therefore, unless the recovery in the home prices, as reported today, continues for a at least a couple more months, the experts do not want to jump to any conclusion.

The home builders have been waiting anxiously for the home market to pick up. The inventory of the foreclosed homes is impacting the sale of the new homes. Without a resurgence in the demand for new homes, the construction activity would remain subdued. It is not a surprise that many economists are advising to brace for a second dip in the recession.

Either the Fed seems to be out of options or does not want to intervene in propping up the economy for now. Without the growth in the economy, the housing market will not pick up and without a growing demand for new homes, the economy is bound to stay subdued.

The economy is also impacted due to the financial conditions of several European nations.

No wonder, many are not celebrating the increase in the home prices reported today. Let us wait and watch the trend in the future.

New Home Construction - Are You Competing With The Builder?

If you are in a new community that has not been completely sold out or where the construction is complete but the builder is stuck with some spec’d out homes, you would be in a way competing with the builder if you try to sell your own home.

Since your home might already be used for a few years at the least, the builder’s homes are normally new. It becomes really difficult to sell a used home that you had bought when the prices were high when new homes are available for much less or the same price in your own community.

Secondly, a builder can have the open house days daily whereas you might have only one day or a few hours every week. Therefore more prospective buyers get to see the new homes than the ones like yours. Obviously that makes the chances of the new homes getting sold first than yours.

The good part is that is can be used in your favor! The sooner the new homes get sold out, the quicker the competition ends for you. Unless you have to have your home sold right away, it might be prudent to hold off till the builder has sold his homes and moved out of your community for good.

Many builders provide a commission to the people who refer new customers. If the builder’s home is sold out, the referrals have the potential to earn some money. In that case to get the builder done first, instead of trying to sell your own home, you can start referring customers to the builder and in turn make some money. When the builder is done for good, you would be in a better position to sell off your home at a higher price.

If the homes in a community get sold faster, even if they are the builder’s, the word of mouth spreads about the rush and there is a huge chance that a lot of customers would flock to your community looking for homes. With more demand, you may easily get a better value for your home!

Therefore, if you are competing with the builder, it might be a good thing for you! Take advantage of the situation and sell your home at a decent price!

When I started looking to refinance my home mortgage, I called up my current bank and asked them what rate I would get if I refinance. Since I have been making all my payments on time and have a reasonably good credit history, I thought I would be offered a much lower interest rate that would help me save a few hundred dollars at least every month. To my surprise, the banker offered me just a quarter point less plus a closing fee. That did not make any sense to refinance. I was given all the lecture by the banker about the home prices going down and the stuff.

I talked to a few brokers, in fact 4 of them, one after the other. I was referred to the first three i talked by some of my friends. I met the last broker when she approached me to ask if i needed refinancing my home Mortgage at one of the community fairs. The first mortgage broker i had met, kept telling me that he was working on my refinance but never gave me the rate I can finally get. The next two did not even bother calling me back. It seems I got lucky with the one I finally happen to get in touch with just by chance.

The broker that I have been now working with has not got my mortgage approved yet but she locked in a rate that was more than a point and a half lower than my current rate. The bank has been delaying the process and this broker keeps on calling the bank and giving me regular updates. She went to great lengths to help me close my line of credit and getting the clearance from the lien office even when the bank I had the line of credit with was slow in giving me the proof that the line of credit was closed.

The frustration now I have is with he bank. They have been asking questions even though all the documents they asked for have been submitted to them. Fortunately, my broker is not giving up. With this kind of a service I do not mind paying for this broker at all.

In a nutshell, the broker has a better insight about the interest rates available from almost all the lenders. With their constant dealings with the lenders there is a symbiotic relationship between the banks and the brokers. They keep themselves updated with the latest changes in the rules that can help you get a get a better refinance deal.

In my case, the usual process of talking to our friends and colleagues to find a broker did not help. But that does not bring down the importance of referrals.

Well before this final step, the approval of the loan itself required the bank to check your financial status, your credit history and you would have already confirmed with your mortgage broker about the interest rates and the monthly mortgage payments.

Sometimes the process of approving the loan can take anywhere between 4 to 8 weeks, depending on how aggressive your mortgage broker is and how accommodating the bank is.

At the time of closing, either you need to meet the person closing the loan in the bank or some place, or the bank person can come to your home at the time of your convenience as they normally are okay with meetings till late in the evenings.

The whole mortgage closing meeting may last from about 45 minutes to an hour and a half depending on how many questions you have for the papers you are asked to sign. Normally the person closing the loan will explain each the purpose of each paper you are asked to put your signature on. If you have any questions you cancer them answered. However, if you are not happy with what is printed on the paper you are required to sign on, any changes to that at the time of closing may not be possible and the closing may need to be canceled to address your concerns. If the bank and you do not come to a mutual agreement, the bank would cancel the entire mortgage approval and you might need to restart the whole process again. Therefore it is good to know in advance all about the mortgage and have your broker explain to you what you would be required to sign for closing the mortgage. Being prepared in advance can save you a lot of anxiety at the time of closing.

Obviously, all the parties whose name is on the mortgage need to be present to sign the required papers for closing the mortgage.

If you have agreed upon some down payment or points, you would be required to make that payment at the time of closing.

Once the closing process is complete, the bank would send the payment to the builder or the home owner if you are buying a home. If you are refinancing your mortgage, the new bank would send the payment to your the bank you had your last mortgage with.

An interest only loan may sound to be very tempting as at the beginning you pay only the interest for the loan and no principal. This can keep your monthly payment very low. However, you cannot have an interest only period that lasts forever, right?

Say for example you take a 30 year fixed rate mortgage where you pay only the interest for the first 10 years. Since in this example, it is a fixed rate mortgage, the interest rate would not change. However, at the end of the 10 years, now you are left with only 20 years to pay off the mortgage that you would have otherwise paid off in 30 years. Also, if the principal had been paid off in the first 10 years, you would have some equity built into the home and you could have refinanced to a lower mortgage at better rates. The monthly payments, when you start paying the principal in the above example, are much higher than what they would have been for a 30 year fixed rate mortgage.

The worst happens when, as it did when the economy collapsed and it has not recovered yet, the value of the homes go down. Since only the interest is being paid in an interest only loan, the principal still stays the same but with the value of the home going down, you technically become “under water” as President Obama calls the situation when you owe more than the value of your home. This makes it impossible or very difficult to refinance resulting in foreclosure and ruining of the credit history that takes a lifetime to build.

The case of the interest only adjustable rate mortgage becomes even more complex. After a certain initial period, even the interest rate increase – which increases your monthly payment even though you do not start paying off the principal yet. When it is time for the principal payments to kick in, the monthly payments go even higher, in fact much higher.

Therefore, it is highly advisable not to fall for the temptations of the interest only mortgages.

Now the point is if it is so risky, why do the banks offer the interest only loans? Well, it was this greed of the banks that led to the collapse of the global economy in the first place. The banks simply wanted to have more and more loans given out and they turned a blind eye toward the repayment capability of the borrowers. The home owners became tempted when there was easy money available and they acting irresponsibly took out jumbo loans which they could never pay. Thousands of people took the interest only mortgages that made their conditions even worse.

Would the new rules from the administration prevent the banks from making the same mistakes again? Well, money can make everyone forget everything. It is very likely that once the economy recovers, the administration would have forgotten to control the banks and the banks would be back to their original ways. For now, all banks are stepping very cautiously in approving new mortgages, but would they in the future – only the future would tell.