30-year Fixed Mortgage Rates Above 5% in 2011?

Could 30-year fixed mortgage rates exceed 5 percent by the end of 2011? The Mortgage Bankers Association (MBA) seems to think so. On Wednesday, the banking organization said they expect interest rates on the benchmark  30-year loan to reach 5.3 percent later this year.

I’ll go a step further with my prediction. I think the benchmark rate could exceed 5 percent by the third quarter of 2011, or sooner. Of course, predictions follow market conditions — and never the reverse.

In 2010, we were spoiled with an average rate of 4.7 percent in this loan category.

This week, the average rate for a 30-year fixed mortgage rose again to 4.8 percent, according to the latest data from Freddie Mac. For the week ending January 28, average mortgages rates were as follows:

  • 30-year fixed-rate mortgage: 4.80%
  • 15-year fixed-rate mortgage: 4.09%
  • 5/1 ARM loan: 3.70%
  • 1-year ARM loan: 3.26%

Rising rates are one of the factors that will put a lid on refinancing activity in 2011. A shortage of qualified homeowners is another factor. Most people who were able to refinance have already done so, back when the rates were at record lows. As a result of these factors, the MBA expects mortgage refinance loans to drop by 66 percent in 2011. Purchase loans, on the other hand, are expected to rise this year.

Some Perspective on 30-Year Mortgage Rates

Many industry analysts expect home-buying activity to increase this year. Mortgage rates are attractive but predicted to rise. Home prices are starting to flatten in many areas. These are prime conditions for home buyers — those who can qualify for a loan, at least.

The question many of these buyers want to know is: Should I buy now, or later in 2011? Is it a big deal if rates do rise above 5 percent this year? Answer: It matters, but not that much. Here is some perspective for you…

Let’s look at my monthly payments and the total amount of interest paid in two different scenarios. In the first scenario, I got a 30-year mortgage rate of 4.8 percent (the average rate when this story was published). In the second scenario, I secured a rate of 5.3 percent, which is the MBA’s predicted average for later in 2011. In both scenarios, I’m taking out a 30-year fixed-rate mortgage for $250,000.

  • For a $250,000 mortgage loan with an interest rate of 4.8 percent, my monthly payment would be around $1,311. The total amount of interest paid over the 30-year term would be around $222,190. For simplicity, property taxes and home insurance have been excluded from this calculation.
  • For a $250,000 mortgage loan with an interest rate of 5.3 percent, my monthly payment would be around $1,388. The total interest paid over the 30-year term would be around $249,774. Again, property taxes and home insurance are not included.

The difference in the monthly mortgage payment from the first to second scenario is only $77. Nothing to set your hair on fire. The total amount of interest paid over the 30-year term is obviously more significant. Here the difference is $27, 584. But remember, this is spread out over a 30-year period. It also assumes that you actually hold the original loan for the full term. Most people refinance or sell long before that point. A little perspective goes a long way.

Disclaimer: This story contains forward-looking statements about 30-year fixed mortgage rates in 2011. These statements are based on predictions and should not be taken as fact. We do not make any claims or guarantees as to what interest rates will do in 2011.

California Home Loan Q&A for 2011

2011 California Mortgage GuideWill you be shopping for a home loan in California this year? If so, you’ll find this list of frequently asked questions helpful.

Home buyers in California this year will need to do plenty of research. This goes double for first-time buyers. A lot has changed with California home loans and lenders over the last few years. The subprime mortgage industry has disappeared. Lending criteria have tightened. And the number of financing options has decreased.

But that doesn’t mean you can’t qualify for a California mortgage loan in 2011. On the contrary, a well-qualified borrower can easily get approved for a home loan in California. But therein lies the question. What is a “well-qualified borrower” by 2011 standards? This is just one of the questions we will answer in our California home loan Q&A series.

Home Loan Questions from People Like You

To come up with these mortgage FAQs, we accepted questions from California residents over a 30-day period. We also conducted several online surveys on the Home Buying Institute website. From all of these questions and responses, we made a list of the most frequently asked questions. So without further ado, let’s talk about what it takes to get a California home loan in 2011.

How Do I Qualify For a California Mortgage in 2011?

By far, this is the number-one question on the minds of most home buyers. Even people who have bought a home before are uncertain about the current qualification guidelines. I’ll cover some of those guidelines in just a moment.

But first, a quick disclaimer: Nothing I am about to tell you is written in stone. When you apply for a California home loan, the lender will look at the big picture in addition to the individual pieces. If you measure up well in four out of five areas, they might make exceptions for the fifth area. For example, if you have excellent credit and a good down payment, the lender might be more flexible with their debt-to-income ratios.

With that disclaimer out of the way, let’s talk about what it takes to qualify for a California home loan in 2011.

Credit Score Requirements

The first thing you need is a good credit score. The definition of “good credit” has shifted upward over the last few years. What was considered a qualifying credit score during the housing boom won’t even get your foot in the door today. Here again, there are exceptions to every rule. But you’ll probably need a credit score of at least 620 to be approved for a home loan in California.

The same goes for FHA loans. When you apply for an FHA home loan in California, you must apply through a mortgage lender in the private sector. The federal government insures the loan, but they don’t actually make the loan. In many cases, there are discrepancies between the FHA’s minimum standards and those used by FHA-approved mortgage lenders. Credit scores are a good example of this.

According to the FHA’s guidelines, you could qualify with a credit score as low as 500. In order to qualify for the 3.5 percent down-payment program, you would need a credit score of 580 or higher. Here’s where the confusion begins. Most California mortgage lenders will turn you away if you have a credit score less than 620. Two of the largest lenders in the country, Wells Fargo and Bank of America, recently announced that they were increasing credit-score requirements on some FHA loans.

Bottom line: If you want to qualify for a California home loan in 2011, you’re going to need a good credit score by current standards. While the definition of “good” varies from one lender to another, most are requiring scores in the 620 – 640 range.

Debt-to-Income Requirements

You’ll also need a manageable level of debt. California mortgage lenders will review your gross monthly income in relation to the amount of debt you have. If your debt payments (for credit cards, student loans, retail accounts, etc.) are consuming too much of your monthly income, you will have trouble qualifying for a California home loan. This is another area where there is some variance. Some lenders adhere to very strict guidelines for debt-to-income ratios. Other lenders have more flexible guidelines that take the bigger picture into account.

The general rule for debt ratios is “28/36.” This means your housing-related debt (i.e., mortgage payment) should not exceed 28 percent of your gross monthly income. And your total debt should not account for more than 36 percent of your monthly income. FHA debt-to-income ratios are a bit more relaxed.

We’ve covered some of the most important criteria when applying for a California home loan. We talked about your credit score, your income and your debt levels. The size of your down payment will also determine whether or not you get approved for a particular loan program. And that leads us to the next frequently asked question in our series…

How Much of a Down Payment Will I Need?

This will depend on the type of loan you are using. If you qualify for a VA or USDA loan, you might not have put anything down. But those loans are only available to certain people. If you use an FHA loan (which is a popular option these days), your down payment could be as low as 3.5 percent. For a conventional mortgage loan in California, the lender will probably require at least 10 percent down.

Lenders today want home buyers to have more skin in the game. This was one of the big problems during the housing crash. A lot of mortgages were given out to people who put little or nothing down, and that meant the lenders carried most of the risk. When all of those California home loans started to go belly up, the mortgage lenders took devastating losses. But I don’t need to recount all of this history for you — you’ve seen it in the news countless times. As a result of all this, some of the strategies that were used to minimize down payments in the past are no longer available. And that brings us to the next frequently asked question in the California home loan series…

Are 80-10-10 Piggyback Loans Still Available in California?

Elsewhere in the country, yes. In California, probably not.

I would again remind you that there are exceptions to every rule. But based on everything I’ve read lately (and my discussions with lenders), 80-10-10 piggyback loans are rare in California these days.

For those of you who are not familiar with this term, here’s a quick definition. A piggyback loan strategy is when you use two mortgage loans to buy a house. In the case of the 80-10-10 strategy, you would get a first mortgage for 80 percent of the purchase price. Then you would get a second mortgage for 10 percent of the purchase price (the second loan “piggybacks” on the first). The remaining 10 percent would be paid by you, the home buyer, in the form of a down payment. This is basically a way to avoid paying private mortgage insurance on the loan, because none of the loans would account for more than 80 percent of the property value.

This type of California home loan was extremely popular during the housing boom. But like a lot of the other creative financing strategies in use back then, you don’t see much of them around today. When shopping for a mortgage in 2011, you probably won’t find a lender willing to offer this option. But if you can come up with a 10-percent down payment, then you can probably qualify for the traditional 90/10 mortgage loan. This is where the lender gives you 90 percent of the purchase price, and you make up the difference with your 10-percent down payment. Of course, you’ll have to pay for private mortgage insurance if you go this route.

Are There Home Loans for People with Bad Credit?

This is going to be a short answer. People with bad credit won’t qualify for a California home loan in 2011. It’s going to be a long time before lenders start giving out subprime mortgages again. Giving mortgages to people with bad credit and low income is what wrecked the housing market in the first place. If you currently have bad credit, you should focus on improving your credit score (here’s how). If you can get your score into the mid-600 range or higher, you’ll have a much easier time qualifying for a California mortgage loan.

When Does It Make Sense to Buy A House?

Do you even need to buy a house? This is the first question you should ask. A few years back, some folks in the housing industry came up with the notion that homeownership was the “American dream.” This is silly. The American dream is whatever you want it to be. Some people can live their dreams without ever owning a house. I know plenty of lifetime renters who are perfectly happy to stay that way. You need to make sure that buying a house improves your quality of life, instead of taking away from it. Buying before you’re ready can lead to heartache — financially and emotionally.

Next, you need to evaluate your financial situation to see if you could realistically qualify for a mortgage loan. It’s tough to get a California home loan in 2011. Lenders are looking for higher credit scores, lower debt levels, steadier income, and larger down payments. If you can measure up in all of these categories, then it might be a good time to buy. If you fall short of the minimum requirements, you’re probably not ready to buy.

Lastly, you need to consider the real estate market where you live. California is a big state with a lot of housing diversity. Some markets are predicted to rebound in 2011, while others are predicted to decline even further. Generally speaking, it’s a bad idea to buy a house in a market where the home prices are still declining. If you do that, you could find yourself in a negative-equity situation soon after buying.

Many are predicting that home prices in California will continue to decline through 2011. I would agree with this, for the most part. I think there are some cities that will see home-price increases in 2011. But I think most of California will experience flat or declining home values over the next year. Home sales in California increased 15 percent last month, over the month prior, and that’s a positive sign.

The bottom line is you need to understand what’s going on in your local real estate market. Before you apply for a California home loan, you need to be confident that a home is a good investment. This will require some extensive reading and research on your part. There’s no way around this. But when you consider the size of your investment, it’s easy to justify homework.

Do I Need to Get Pre-qualified Or Pre-approved for a Loan?

I recommend that you get pre-approved for a mortgage before shopping for a house. In most cases, getting pre-qualified is a waste of time. The difference between these two things has to do with the amount of scrutiny on the lender’s part. For a pre-qualification, the lender doesn’t look at much of your financial background. They might only look at your income and then tell you how much of a loan you could get. But when you consider how tough it is to get a California home loan these days, you can see why this kind of narrow assessment wouldn’t be very helpful.

A pre-approval, on the other hand, goes much deeper. Here, the mortgage lender will review all aspects of your financial situation. They will check your credit, review your income and debt levels, etc. In many ways, the mortgage pre-approval is similar to the final approval process — though you’ll provide more documentation for the final approval.

The benefits of getting pre-approved for a California home loan are threefold. It will help you identify any qualification problems you have. It will help you limit your house-hunting process to the size of loan you might get. And it will also make the seller more likely to accept your offer. The seller (whether it’s a homeowner or a bank) wants to know that you’ve been given a green light by a mortgage lender. Granted, the pre-approval does not guarantee you’ll get the loan. But it’s the closest you can get to an actual guarantee before you’ve found a house. So it gives the seller the comfort of knowing your finances have gone under the microscope.

This completes our FAQ series about California home loans and mortgage lenders. If you would like to learn more about the mortgage process or what it takes to get a loan in 2011, you can use the search tool located at the top of this website. There are two sides to the Home Buying Institute. We have the news side you’re reading right now, as well as an educational side. The search tool will give you access to thousands of news stories, how-to articles, and other resources for home buyers.

5/1 ARM Loan: Most Popular Adjustable Loan in 2011

The 5/1 ARM loan continues to be the most popular mortgage loan in the adjustable-rate category. But ARM loans as a whole still only account for about 7 percent of home-purchase loans. This is in stark contrast to their 2004 peak, when 40 percent of all purchase loans were adjustable. This is according to Freddie Mac’s 27th Annual ARM Survey.

What is a 5/1 ARM Loan?

The 5/1 ARM is often referred to as a “hybrid” loan, because it starts off like a fixed-rate mortgage before adjusting. In the case of the 5/1 hybrid ARM, the loan carries a fixed interest rate for the first five years. That’s what the first number signifies. After the initial fixed-rate period, the interest rate will begin adjusting every year. That’s what the second number signifies.

You can learn more about the 5/1 hybrid ARM loan in this article on our blog. The video below (courtesy of SketchNest.com), gives you an illustrated example of how these loans work.

According to Freddie Mac’s survey, nearly all lenders who offer adjustable-rate mortgages offer the 5/1 ARM variety. Some lenders offer hybrid loans with a longer term, such as the 7/1 and 10/1 ARM loans. These mortgage behave the same as the 5/1 ARM, but the initial fixed-rate period is seven or ten years respectively. These options are not as widely offered as the 5/1 hybrid. Only 64 percent of the surveyed lenders offered the 7/1 option, and only 23 percent offered the ten-year ARM.

The most popular mortgage category of all is still the 30-year fixed-rate mortgage.

Adjustable Mortgages Get a Bad Reputation

Adjustable-rate mortgages developed a bad reputation during the housing crisis. During the housing boom, mortgage lenders were using these loans to entice buyers. The loans would often come with a “teaser rate” that was significantly lower than the rate on a 30-year fixed mortgage. But when these loans started adjusting to a higher rate, many homeowners saw their mortgage payments double. This was widely reported in the news, which is why home buyers today are wary of the ARM loan.

“Homebuyers have shied away from ARMs because they are wary of the risks,” said Frank Nothaft, vice president and chief economist at Freddie Mac. “The potential for much larger payments if future interest rates are significantly higher … have led consumers to prefer fixed-rate loans instead of ARMs.”

Related story: The Decline of Adjustable Mortgages in 2011

When It Might Make Sense to Use an ARM Loan

In some home-buying scenarios, it might make sense to use an ARM loan. If, for example, you only plan to stay in the home for a few years, the 5/1 hybrid ARM might work out to your advantage. You could secure a lower interest rate for the first five years (when compared to a fixed-rate loan), and then you would sell the house before the uncertainty of the adjustment period.

Of course, if you’re unable to sell the home for some reason, you might be stuck with the ARM loan. This is what happened to hundreds of thousands of homeowners over the last few years.

You also have to consider the interest-rate differential between adjustable and fixed-rate mortgages. If the ARM loan rate is only slightly lower than the (more predictable) fixed mortgage, it wouldn’t make sense to take on the risk of an ARM. This is what we are seeing right now. According to Frank Nothaft of Freddie Mac: “Fixed-rate loans currently carry extraordinarily low rates, and initial ARM rates are only slightly lower, making fixed-rate product more attractive.”

Why You Should Consider Buying a Foreclosure Home in 2011

Planning to buy a home in 2011? If so, you should also consider buying a foreclosed home. There will be plenty of them to go around in 2011, and they typically represent a good deal for buyers.

According to the folks at RealtyTrac (who know more about foreclosure stats than you and I, and just about everyone else), 2011 could be a record year for home foreclosures. They expect foreclosure filings in the U.S. to climb by as much as 20 percent in 2011. That’s astounding, when you consider the amount we had in 2010.

Rick Sharga, senior vice president at RealtyTrac, thinks we will see a peak in foreclosures in 2011. The hardest-hit areas, he said, will continue to be those that were overbuilt, overheated and overpriced during the housing boom. This includes places like Phoenix, Las Vegas, South Florida, and the central valley of California — among others.

But regardless of where you live, there are bound to be foreclosed homes available in your area. These homes can be a good deal for buyers. They are often priced a little below their true market values to ensure a quick sale. In some cases, they’re priced well below market value. When you consider the sheer volume of foreclosure properties, and the potential savings they bring, you can see why they are worth considering.

3 Ways to Buy Foreclosures in 2011

Buying a foreclosure home is not for everyone. No matter how much they research the process, some buyers are simply not comfortable with it. And that’s okay. There are plenty of homes available through traditional sales as well. The following information is for the hardier souls, those who are willing to brave the potential uncertainty of buying a foreclosed home.

So, how do you go about buying a foreclosure home in 2011? What are the steps involved? First, you need to understand the different stages in the foreclosure process. The process varies from one state to another (based on state laws), but the basic stages are the same:

1. Pre-foreclosure: John Doe falls behind on his mortgage payments. Maybe he lost some of his income, or perhaps his mortgage payment increased in size due to an ARM loan adjusting. Two or three months after falling behind on the payments, John receives a notice of legal action from the lender. This is the pre-foreclosure stage, where the homeowner has defaulted but the lender has not yet foreclosed on the property. When the lender files a legal record of the homeowner’s default, it becomes public information. During this stage, John might try to get back on track. He could do this through reinstatement, or one of several other foreclosure-avoidance options. He might even sell the home through a short sale, with the lender’s permission. This is one way to buy a foreclosure in 2011 (or a pre-foreclosure, to be exact). If none of these options work out, the bank will eventually foreclose on the home.

2. Auction: This is often the next stage in the foreclosure process, after the bank forecloses on the home. At this point, the homeowner has been evicted from the property. Next, the bank wants to sell the home as quickly as possible, since it’s a “non-performing asset.” An auction is one way to go about it. Bidders who have cash in hand can bid on the home. Generally, their bids must be above a certain starting point. If the property is sold through auction, that’s the end of it. If it’s not sold at auction, the home goes back on the market as a bank-owned house. Sometimes the auction process is skipped entirely. For example, if the bank feels there’s not enough local demand for such properties, they might skip the auction and just list the home on Realtor.com, RealtyTrac.com and similar websites.

3. Bank-owned home: When a foreclosure home comes back on the market for sale, it’s usually referred to as a bank-owned home. You can find these homes listed on the two websites mentioned above. The home might have been through an auction prior to reaching this stage, or the bank / lender might have skipped the auction. Either way, you can be fairly certain that the homeowner who defaulted is now out of the picture entirely. From a buying standpoint, most experts agree that this is the safest stage of the process. You might not get the kind of deal you would get during an auction. But you can probably rest assured that the home is “free and clear” of any liens or other legal claims. Learn more about buying bank-owned homes.

Bank Owned

So how much money could you save by buying a foreclosure home in 2011? This depends on who you ask. It also depends on the kind of market you’re in, particularly the supply and demand situation. Most sources say the average savings is 5 – 15 percent off market value.

But this brings up another question. How much is market value? To answer this question, you need to look at comparable sales, or comps, for the area where you plan to buy. Try to find sales data from regular transactions (not short sales or foreclosures). This will give you an idea where the market is, in terms of home prices. It will also help you spot a good deal, whether it’s on a foreclosure home or a regular property listing.

Government Mortgage Assistance for California Homeowners

Taxpayers from all over the country are chipping in to help unemployed California homeowners with their mortgage payments. More or less. The Unemployment Mortgage Assistance Program (UMA) will use federal funds to give mortgage-payment assistance to unemployed homeowners in California. This will undoubtedly be a popular topic among Californians in 2011, so we have put together a fact sheet with the pertinent details.

Mortgage Assistance for the Unemployed

The Unemployment Mortgage Assistance Program went into effect this month, January 2011. The program is managed by the California Housing Finance Agency (CalHFA). This program uses federal funds to provide temporary mortgage assistance for California homeowners who have lost their jobs. Homeowners must meet other eligibility criteria, in addition to being unemployed. A partial list of criteria can be found below.

The purpose of the program is to provide financial assistance to California homeowners who have lost income due to unemployment. The funding allows the homeowners to make their mortgage payments for a period of time, while they seek additional employment. So it’s an unemployment and foreclosure-avoidance program rolled into one.

California homeowners who are unemployed and meet other eligibility criteria could receive $3,000 per month or 100 percent of their mortgage payment, whichever is less, for up to six months. Again, the goal here is to provide enough mortgage assistance to help homeowners avoid foreclosure, until they are able to find new employment.

Eligibility Criteria for California Homeowners

In order to be eligible for the mortgage assistance program, California homeowners must meet the following criteria (at a minimum):

  1. Income limitations: The unemployed homeowner must meet the program’s definition of “low- to moderate-income” household. This means the borrower’s income cannot be more than 120 percent of the HCD Area Median Income for a family of four, in the county where the homeowner currently lives. Learn more (PDF)
  2. Hardship: The unemployed homeowner must complete a form that documents the reasons for their financial hardship (e.g., reduced income resulting from a job loss). This form is called the Hardship Affidavit / 3rd-Party Authorization. This is the start of the paperwork process for the California mortgage assistance program. Borrowers will be asked to provide a variety of other financial documents as well. The loan servicer or housing counselor will provide a list of these documents.
  3. Unemployment: The homeowner must be eligible to receive unemployment benefits in the state of California.
  4. Default: The unemployed homeowner’s mortgage loan must be delinquent (behind on payments), or at risk of “imminent default.” This must relate to the loss of employment, and it must be clearly outlined in the hardship letter described in item #2 above.
  5. Origination: The homeowner’s first mortgage must have been originated on or before January 1, 2009.
  6. Balance: The current mortgage balance (unpaid principal) cannot be more than $729,750. This number might look familiar. It’s the conforming loan limit for high-cost areas such as California, set forth by Fannie Mae and Freddie Mac.
  7. Participation: Your mortgage lender or loan servicer must be actively participating in this program. Participation is option for lenders. At present, only a handful are involved. But the CalHFA expects more loan servicers to join in soon.

Homeowners who meet all of the criteria listed above may be eligible for the California mortgage assistance program. Final eligibility will be determined by counselors with the California Housing Finance Agency, or the loan servicer who is currently servicing the mortgage loan.

Where to Learn More

If you would like to learn more about the mortgage assistance program for California homeowners, please contact the California Housing Finance Agency. You can also visit the website they’ve set up for this program: www.keepyourhomecalifornia.org. At the time this article was published, they were instructing homeowners to call: 888-954-KEEP. But you should check the aforementioned website for current instructions and guidelines.

30-Year Mortgage Rates Going Into 2011 – 4.86 Percent

Happy (almost) New Year! The benchmark 30-year mortgage rate rose to 4.86 percent this week, according to the latest data reported by Freddie Mac. Rates in other mortgage categories are up as well, with the exception of the 1-year ARM loan. Going into 2011, we can probably expect more of the same.

This is the highest the average 30-year rate has been since May 2010. It also aligns with many of the mortgage predictions compiled in our housing market predict-o-meter. The consensus of those predictions is that rates will gradually trend upward throughout 2011, perhaps reaching or exceeding 5 percent by year’s end.

While these rates are attractive, they don’t erase the concerns people have about falling home prices. Indeed, prices are still falling in many cities across the country. Many would-be home buyers are rightfully concerned that depreciation in home values would wipe out the benefits of getting a low mortgage rate. It’s a valid concern, and it will keep a lot of buyers on the fence for now.

The average rate for a 15-year FRM rose slightly from 4.17 to 4.2 percent. The 5/1 ARM rose from 3.75 to 3.77 percent. Again, this is according to Freddie Mac’s weekly survey of the primary mortgage market. It is considered one of the most accurate “snapshots” of current mortgage rates in the U.S.

Putting the Rates in Perspective

This kind of news may come as a shock to potential home buyers. After all, 30-year fixed mortgage rates have risen steadily for the last seven months. But let’s keep it in perspective. At this time last year (December 31, 2009), the average rate for a 30-year fixed-rate mortgage was 5.14 percent — compared to the current average rate of 4.86 percent, as we head into 2011. For a while there, we were spoiled by record-low rates near 4 percent. But you can’t expect that kind of thing to last forever.

In a nutshell: The cost of borrowing will remain relatively low for most of 2011, though we’ve probably seen the last of the record-low rates. Housing costs are equally affordable. In fact, some economists are predicting a double-dip in home prices throughout much of the country. For a qualified home buyer, the 2011 housing market could be a kid-in-the-candy-store scenario.

The Decline of Adjustable-Rate Mortgages in 2010

The popularity of adjustable-rate mortgage (ARM) loans has declined sharply since the housing boom. This is partly because home buyers today are more aware of the risks associated with ARM loans.

Money HouseAt the height of the housing boom, adjustable-rate mortgages were about one-third of the mortgage market. They also accounted for roughly 80 percent of subprime loans. By 2008, ARM loans only accounted for about 15 percent of mortgage activity.

Today, as we move into 2011, adjustable-rate mortgages are only 5 – 6 percent of the market. That’s a huge decline, and it’s evidence of the growing stigma of the ARM loan.

How Does an Adjustable-Rate Mortgage Work?

Most adjustable-rate mortgages in use today are actually “hybrid” loans. This means they start with a fixed interest rate for a certain period of time, usually one to five years. After this initial period, the interest rate on the loan will begin to adjust or “reset” at some predetermined interval.

For example, the 5/1 ARM loan carries a fixed interest rate for the first five years, after which the rate will adjust every year. That’s what the “5/1” numbers signify. Adjustable-rate mortgages usually have caps that limit how much the rate can increase from one adjustment to the next, and also over the life of the loan.

Learn more about ARM loans.

A Brief History of ARM Loans

In 1982, during the Reagan administration, the U.S. Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA). This legislation allowed non-federally chartered mortgage lenders to offer adjustable-rate mortgages. Before the passage of this act, banks were mostly limited to making conventional fixed-rate mortgages.

This legislation also paved the way for balloon loans, option ARM loans, negative amortization loans, and other so-called “exotic” mortgages. In more recent years, this act has been criticized for allowing lenders to obscure the total cost of a loan (and here the term “fuzzy math” comes to mind).

Adjustable-rate mortgages gained popularity through the latter half of the 1980s. In the mid 90s, when the housing boom was heating up, ARM loans exploded in popularity. At the height of the boom, one in three mortgage loans came with an adjustable rate. Through 2011, however, these loans will probably only account for about 5 percent of total mortgage applications.

Unpredictable in the Long Term

The risk associated with adjustable-rate mortgages comes during the first adjustment period, and every adjustment thereafter. Even if the rate is fixed for the first five years, it’s going to start changing eventually. In most cases, the rate will adjust upward to follow some kind of index. If the initial interest rate is heavily discounted, then the rate may rise significantly down the road. Save now … pay later. This kind of unpredictability makes the ARM loan a bad choice for a long-term stay.

When to Consider Using an Adjustable Mortgage

There is only one scenario when I recommend using an adjustable-rate mortgage. That’s when you know for sure that you’ll only be in the home for a few years. If you plan to sell the house and move after a few years, you could avoid the uncertainty of the first adjustment period. So, if you can get a lower initial rate with an ARM loan than a fixed mortgage, it might be in your interest to use one.

The key is to understand how these loans work, and what risks they carry. What happens if you’re unable to sell the home for some reason? Can you afford the new payments after the loan adjusts? You need to answer these questions before making a decision.

Freddie Mac Offers a Glimpse of the Mortgage Market in 2011

Editor’s note: This article contains outdated information pertaining to mortgage rates. For the most recent information available, be sure to visit our forecast page.

Ask 20 different economists to predict mortgage trends in 2011, and you’ll get 20 different predictions. (And don’t forget to take your No-Doz pills first.) But there are a handful of economists who are in a position to give fairly accurate predictions. One of them works for Freddie Mac, the newly-government-owned purchaser of home mortgage loans. Here’s a 2011 mortgage outlook from Frank Nothaft, the chief economist at Freddie Mac.

Frank NothaftParaphrasing: Mortgage rates will remain relatively low during 2011. Some rate increases can be expected between now and then. The average rate for a 30-year fixed mortgage will probably stay below 5 percent throughout the year, while the 5/1 hybrid ARM will probably stay below 4 percent.

Translation: 2011 will probably be a lot like 2010, as far as mortgage rates go. Mr. Nothaft’s forecast for 2011 closely matches the consensus we have posted on our housing market predict-o-meter.

What We Might See in 2011

What else will change in 2011? Disclosing the fact that we have no crystal ball in our office, here’s our view:

The job market will slowly improve through 2011, though the national unemployment rate will likely remain over 9 percent. This will increase the demand for housing in many cities across America. But a full recovery of the housing market probably won’t take place until 2012. Home prices will continue to decline in many areas, at least for the first half of the year.

Housing inventory will be the primary cause for these declines — foreclosure inventory in particular. More people will be buying homes, when compared to 2010. Refinance loans will drop considerably. Oh, and we haven’t heard the last of the robo-signing drama.

What It Means to Home Buyers

Are you planning to buy a home in 2011? Here’s how all of this may affect you. If you have steady income and a good credit score, 2011 might be a great time to buy a home. You’ll have plenty of buying power, in terms of home prices and mortgage rates. Sellers who have been on the market for a while should welcome an offer from a qualified buyer, even if it’s below their asking price. This puts the negotiation process in your favor, so long as you make a reasonable offer based on recent sales.

Just keep an eye on your local housing market. Start keeping tabs on what home prices are doing in your area, and what they are expected to do over the next few years. You don’t want to purchase a home in a steadily declining market. If you do that, you’ll likely end up with negative equity inside of a year. But if your real estate market is bouncing along the bottom, so to speak, you might want to jump in while the rates are still low. The key is to make an informed decision, based on plenty of localized research.

Disclaimer: The mortgage rate forecasts in this article should not be taken as gospel. They are an educated guess, based on current conditions in the economy.

Benchmark Rate to Average 4.4 Percent, Says MBA

Editor’s note: This is an outdated article. For the most recent mortgage forecasts available, please see this page.

On Tuesday, the Mortgage Bankers Association (MBA) released its forecast for 2011 home-loan rates and other housing trends. They feel the benchmark 30-year fixed mortgage rate will average 4.4 percent for the remainder of 2010. For 2011, the MBA predicts that the benchmark rate will slowly but steadily increase to around 5.1 percent.

Various factors are driving our rate forecast,” said Jay Brinkmann, MBA’s Chief Economist and SVP for Research and Economics. “Absent some blockbuster post-election announcement from the [Federal Reserve] on November 3rd, we do not expect to see a further decline in rates.”

The MBA also expects to see a modest rise in home sales in 2011, along with a corresponding rise in home purchase loans.

If their rate predictions come true, it means that mortgage financing will be more affordable this year than next. But how much more affordable? Let’s look at some pricing scenarios to see how the percentages play out when applied to an actual loan amount.

Mortgage Pricing Scenarios

At the time of publication, the average rate for a 30-year fixed mortgage was 4.23 percent (up from 4.19 percent two weeks ago). The MBA is forecasting that rates will rise to 5.1 percent by the end of 2011. At first glance, these numbers don’t mean much. Sure, 4.4 percent is lower than 5.1 percent. But how does that translate into actual dollars? Here’s an example of how much money a home buyer could save by getting the lower of these two rates.

  • A 30-year fixed-rate mortgage in the amount of $250,000 at 4.4 percent interest will have a monthly payment of $1,251 (excluding insurance and taxes). Total interest paid over the full term of the loan = $200,684.
  • A 30-year mortgage for the same amount with a rate of 5.1 percent will have a monthly payment of $1,357 (excluding insurance and taxes). Total interest paid over the full term of the loan = $238,654.

In the second scenario, I would pay an additional $106 a month toward my mortgage payment. The higher interest rate would account for this increase. But look at the total amount of interest paid over the life of the loan. That’s where the true difference becomes apparent. In the second scenario, I would pay an additional $38,000 worth of interest. I could put my kid through college for that amount of money.

What does all of this mean? It means that if the MBA’s predictions are accurate, mortgage loans are going to be more expensive in 2011. It means that you could save money by buying (or refinancing) a home sooner, rather than later.

We are tracking these and other housing market predictions for your convenience.

Disclaimer:We make no assertions or guarantees about the forward-looking statements made by the MBA. We have provided this information for educational purposes only. There are many variables that could render their predictions inaccurate. No one can predict the mortgage market with 100% accuracy. Additionally, the rate you receive on a home loan will vary from the average rate, based on your credentials as a borrower (credit score, down payment, debt level, etc.).

Survey: Americans Feel the Government Hasn’t Done Enough Foreclosure Prevention

A recent survey by the Home Buying Institute revealed how Americans feel about the federal government’s efforts to reduce foreclosures. The majority of respondents felt that the government had not done enough to reduce foreclosures. Perhaps most surprising was the large number of people who said the government should never have gotten involved.

Consumer Survey

Survey Details: We conducted this survey on the Home Buying Institute website. Responses were collected over a one-month period, between September 23 and October 23, 2010. The survey was presented to a mix of home buyers and homeowners, many of whom were in the market for a mortgage loan (for either purchase or refinancing purposes).

Of those who responded:

  • 43.8 percent said the government has not done enough to reduce foreclosures.
  • 25.7 percent said the government has done enough.
  • 22.9 percent said the government never should’ve gotten involved to begin with.
  • And 7.6 percent felt that the government has done too much.

“This was a survey without an agenda,” said Brandon Cornett, publisher of the Home Buying Institute. “We did not suggest that it was the government’s role to reduce foreclosure rates. We merely posed the question and allowed people to respond.”

Most surprising was the fact that nearly a quarter of respondents thought the government shouldn’t have gotten involved at all. “That was certainly a surprise,” said Cornett. “Normally you hear people complaining that the government doesn’t help enough. I didn’t expect so many people to say they should have stayed out [of the foreclosure mess] altogether.”

About the Home Buying Institute

The Home Buying Institute has been educating home buyers and homeowners since 2006. In 2010, the company began conducting online surveys to learn more about its audience. You can view the most recent surveys here.

Image Use: You are free to use the bar-graph image above on your own website or blog. A link back to this story would be appreciated. If you have questions about this survey, please email us.