Home Loan Articles

With current mortgage rates hovering between 4-5% a lot of homeowners are strongly considering refining their already low-mortgage rates that they obtained just a few years ago. Today’s mortgage rates are actually the lowest they’ve been in 50 years for a 30-year mortgage. Before that time most mortgages in United States were 20 or 25 year mortgages, which means that today’s mortgage rates are pretty much the lowest historical mortgage rates that consumers have ever seen on a 30-year-fixed-rate mortgage or home loan.

The question that many homeowners are now asking is: “How low can mortgage rates go?”

Obviously, if the rates go much lower then many homeowners with a good credit rating may consider holding off refinancing their home loan until the rates hit rock bottom. But knowing what the “rock bottom” mortgage rate is before they start going back up again is obviously very difficult to tell.

There is no one organization which controls, sets or determines the mortgage rates you pay at a bank. It is true that the Federal Reserve Board controls the “federal funds rate” which is the interest rate that banks are allowed to lend money to one another. But the Federal Reserve is not the only factor in determining mortgage rates. Instead, there are a number of different situations and variables controlling mortgage rates including inflation, bank financing efficiencies, and the various rates of returns of other investments.

You see, mortgages are pretty much like any other investment: people and banks buy and sell mortgages in order to make money off them. These mortgages are often bundled into “mortgage backed securities” and they are just another type of investment. You put money in and hope that you will receive more money back through interest and other payments. But, like any other investment, they also have to be competitive. If the rate of return on other investments like Treasury bonds goes up then it is likely that the mortgage rate will also go up to give investors in mortgages a similar product. The same is true if the rates go down.

While this is helpful to know, it doesn’t necessarily tells us exactly how low mortgage rates can go. The world economy is in a state that it has never been before, so there are no 100% guaranteed rules about what can happen and how low rates can go before they essentially stop going down and begin going back up.

That being said, there are some theoretical limits to how low interest rates can go and we might be getting close to that point. Some housing experts have mentioned the possibility of a 0% mortgage loan, but that seems unlikely given the understanding that home loans are used as a tool to make money and giving out such large no interest loans would probably not be a good investment in the long-term.

There is, therefore, a limit to how low mortgage rates can go. Again, there is no economic historical data to prove this, but it is generally believed that most lending institutions could not loan money below the 2-3% level without losing money through administration and risk associated with mortgage lending at the moment. Larger institutions may be able to go even lower because their cost to administer home loans could be lower than the costs which smaller lenders and banks need to incur.

Most people understand what happens when a bank or lender forecloses on a home: the homeowner (borrower) essentially stops paying the mortgage and the lender has the opportunity to take back and then sell the home to someone else through the process of foreclosure. But high foreclosure rates are just one of the problems facing the housing industry. Another problem for both banks as well as homeowners is the large amount of home equity loans and home equity lines of credit that are also being defaulted on as home values drop and the job market stagnates.

Avoiding Foreclosure

First, some good news. If you have a mortgage as well as a home equity loan and you are able to only afford one, you may still be able to avoid foreclosure by choosing the right loan to pay off. First, we need to look at each type of loan and what it really is.

A mortgage is a loan from a bank which allows you to buy a house, but there’s more to it than that. Essentially, the bank buys the house from a seller and then holds the house for you. Each month you pay the bank a portion of the money plus a little interest (which is how the bank makes a profit). In return for this interest you are allowed to live in the house. Your mortgage loan is, essentially, a secured loan against a house. This means that if you stop paying the loan then the bank has the right to take back your home and sell it to someone else. Your home is essentially the collateral on your mortgage.

A home equity loan starts out in a similar way: the bank loans you money in return for a portion of the value of your home. So if your home is worth $200,000 and you only owe the bank $100,000 then you essentially have $100,000 of “stored value” or equity in your home. A bank may then offer you $50,000 cash as a home equity loan, knowing that if you default on the loan then they may still be able to sell your home and get their $50,000 back. Again, this is essentially a secured loan against the rising market value of your house. You can read an expanded explanation of secure vs unsecured loans online.

But what if your home’s value drops back down to $120,000 instead of $200,000? That essentially means that you no longer have the equity in your home that you once had. Your “secured” home equity loan becomes an “unsecured” loan because the equity that once served as collateral as all but disappeared.

Now that you see what is happening with foreclosures and home equity loans, let’s make some intelligent decisions. If you are faced with the prospect of only being able to pay your mortgage or your home equity loan (which is usually, but not always, much less than your mortgage) then you should probably choose to pay your mortgage on time. The size of the loan makes a big difference in this case, but it is also generally more difficult for a bank or lender to fight a homeowner that stops paying a home equity loan when the equity is gone. Banks rarely are able to actually foreclose on a home for an unpaid home equity loan simply because another bank often owns the mortgage.

When someone defaults on a home equity loan the bank generally has two options. The bank can modify your loan or, in rare cases, actually forgive it. More likely, though, the bank can sue you in court just as they might if you had taken out an unsecured loan and then defaulted on it. This is a time-consuming and expensive process for a bank and, in some cases, is simply not worth it. If they do file a successful lawsuit against you then you may indeed be liable for paying back the home equity loan through garnished wages or through a modified payment plan.

Home Equity Loans After Foreclosure

After your home is foreclosed upon there is still the problem of having an open home equity loan. Once the bank takes your home it has the opportunity to sell it to another buyer. If the sale of the home generates enough money to pay of both the mortgage and the home equity loan then you may be off the hook for any debt.

In today’s housing market, though, more and more homes are underwater and selling for much less than the amount of money owed on them. Again, this means that your secured home equity loan may, in essence, turn into an unsecured personal loan. You could very well be liable to pay back that money and, in many states, you could be sued. That being said, some states do have laws which don’t allow lenders to come after you if you used that home equity loan money to actually purchase the home. The most common type of home loan that allows you to spend you home equity loan on the purchase of a home is called an 80/20 loan and it allows you take out one loan for 80% of the value of the home and a second loan (often lumped together with the first) for the additional 20% value of the home based on the equity value of the house. These types of loans are rarely offered due to the limited amount of equity available on most homes that are bought and sold today.

The amount of many home equity loans is so substantial that they should almost always be factored into the decision when deciding if you should walk around from your home. Even if you walk away from your home and your house is foreclosed on, the amount of money you owe through a home equity loan or open home equity line of credit could be staggering.

Home sales are lagging ever since all the special government home buyer incentives and tax credits dried up, so banks are pushing down mortgage interest rates to lows not seen in the past 30 years. Many people, especially those who bought their homes in the last 10 years or so, are asking themselves, “Should I refinance my mortgage?” and “Should I refinance my home loan and pay off other debt with these low rates?”

Only you can ultimately decide if this is the best finance move for you, but are are some of the things you should think about when you’re considering refinancing your home loan:

Current Mortgage Interest Rate Vs. New Mortgage Interest Rate: This is the most obvious thing to think about. If you originally bought your home with an 8% fixed interest rate loan or if you adjustable rate has risen over the year and yet you can get a fixed rate home loan today for about 5%, then refinancing your mortage could work out to be a good deal for you. But remember, when you refinance your home you have to pay a number of fees for filing paperwork, new home inspections, legal review and other services, so it won’t be all savings. Generally, when the new rate is more than 2% less than your old mortgage rate you should seriously look into whether or not you can save a fair bit of money over the long run.

Adjustable Rate vs Fixed Rate: If you have an adjustable rate mortgage now and your rates are good, you may still want to consider switching over to an equally low fixed-rate mortgage. While there are no guarantees, the chances are good that rates will rise again at some point over the life of your home loan, so locking in a fixed rate mortgage when you have a chance could end up saving you lots of money over the life of the loan, even though it may not make much difference in your monthly payments at the moment.

The Home Equity Problem: A lot of people have lost a fair amount of home equity over the past several years as home values have plummeted. This means that even though you’ve been paying your mortgage for years you may actually be underwater on the home loan or still not have much equity built up. Most mortgage companies and banks require your mortgage refinancing amount to be no more than 80% of your home’s actual value. So if your home is now valued at $200,000 you would only be able to refinance $160,000 ($200,000 x .80 = $160,000). In this example you could probably only refinance your home if the amount of money you owed on your existing mortgage was less than $160,000.

All About Mortgages: Insider Tips to Finance or Refinance Your Home in Today’s Economy

Another Thirty Years of Payments: Most mortgages are still 30-year terms. If your current mortgage was a 30-year mortgage but you’ve already been paying for 5 years, then you only really have 25 more years of payments until you own your home outright. If you refinance your home then the clock is essentially reset and you’ll once again be making home loan payments for 30 years from the day you sign the papers. This extra five years could push back your retirement investing plans or even impact when ultimately decide to quit working.

Are you Selling Your Home Soon: You probably don’t want to refinance your home if you’re going planning to be moving within the next several years. You may save some money on your monthly payments, but the refinancing fees may still end up costing more than you would ultimately save in the next few years. It also doesn’t help improve your credit score and it may actually hurt your chances of getting a decent interest rate on the loan you take out for your new home.

Do You Really Need the Extra Cash: Many people take advantage of home loan refinancing so that they can essentially borrow more money at the same or lower rate than they are paying now. They then use that extra money to pay off additional bills or car loans or other outstanding debt. But loan interest rates across the board are much lower these days, so many people are finding that borrowing money from a home loan at 5% to pay off a car loan that only has a 2% or lower interest rate simply doesn’t make sense. Many people have also downsized their economic needs in this recession and are now saving more money than ever. Overall, the “need” for money is not as great as it once was. If you’re happy with your current home loan and you find that refinancing won’t really save you very much money in monthly payments then it may not be worth borrowing just for the sake of taking out another loan.

While simple online loan calculators are good for giving you a general estimate of what you might pay with a refinanced mortgage, the exact fees and monthly payments will have to be worked out by individual lenders. One bank or institution may charge for certain services that another lender offers for free. You’ll also want to keep in mind that there is usually a lot of paperwork, phone calls and other things that you have to do to refinance your home loan, so it’s not something you want to jump into unless you have are willing to commit some time and energy into making sure you find the best deal you can. That being said, the low mortgage rates being offered by different banks and lending institutions are definitely making refinancing a home loan a much more attractive offer for many existing homeowners!