Mortgage Rate News

One of the debates that often surfaces surrounding the home mortgage loan is whether or not it is worth it to pay your mortgage off early. Since I am of the school that it is better to get out of debt as soon as possible, I tend to be on the side of doing what you can to pay off the mortgage early. Others are not so sure. The Greenest Dollar has a great article examining the debate over whether or not to pay your mortgage off early:

Don’t pay your mortgage off early

There are some compelling arguments for keeping your mortgage:

• You get a tax deduction for your mortgage interest.
• You can make your mortgage payments, and then invest the extra in the stock market. (Although for those looking to make immediate returns, this may not be the best move right now.)
• You have more liquidity when your assets aren’t all tied up in your house.

Pay your mortgage off early

Of course, the flipside is that there are definite advantages to paying your mortgage off as soon as possible. (The Greenest Dollar points out that “mortgage” is French for “death contract.”)

• The feeling of freedom you have when you get rid of a rather large obligation. (Stress is reduced as well.)
• Once you pay off the mortgage, your monthly liquidity returns, since you have that cash that would have gone to the mortgage payment.
• You actually own your home. Remember: As long as you have a mortgage, you do not actually own your home. The mortgage lender does.
• You save a great deal of money in interest payments — more than you can save in tax deductions.

One way you can pay off your mortgage early is to set up payments on a biweekly schedule, rather than a monthly schedule. This way you get one extra payment a year. Another thing you can do is send an extra payment when you have the money, designated as “for principal only”, to reduce the amount you owe. Just make sure that your mortgage doesn’t come with a prepayment penalty.

Mortgage applications have dropped, but that’s not too bad, considering the record numbers of mortgage applications that have been pouring in the last couple of weeks. CNN Money reports on the state of the mortgage market:

“While applications may have been somewhat lower last week, it’s important to remember we are coming off the previous two week’s record numbers. The recent rate drop was a huge incentive for consumers to refinance into fixed rate loans or enter the market to purchase a home,” according to a statement from Bob Walters, chief economist with Quicken Loans.

Recently, the Federal Reserve announced that it was buying debt from Fannie Mae and Freddie Mac. The intention was to force mortgage rates lower in an effort to kick-start the mortgage market. On the mortgage applications side, it appears to have worked. Applications are up — especially in terms of refinancing. Indeed, reports are that nearly 74% of mortgage applications this past week were the result of refinancing.

In many cases, mortgage lenders (especially local and regional lenders) have been advertising lower fixed rates. However, it is worth noting that adjustable rate mortgage have been getting play as well. These rates are so incredibly low, that they are luring refinancing. And, if the Federal Reserve lowers rates again next week, ARMs could go even lower than they already are. The real trick, though, is getting approved for a second home mortgage loan. Even though interest rates are low, some banks remain rather picky about who they approve. And that means that you may not get a new home loan.

Fixed rates are plenty low as well. And if you can refinance to a fixed rate, this would be the best time to do it. Fixed rate mortgages won’t be this low forever — and I don’t know when they’d come this low again. It would be wise to try and get a fixed rate if possible. We’ve all seen what resetting mortgage can do.

Back at the beginning of the year, loan modification was hailed as the way to help troubled homeowners deal avoid foreclosure. Turns out that in many cases, loan modification only helps delay the inevitable. CNN Money reports on foreclosures:

Some 53% of borrowers with loans modified in the first three months of 2008 and 51% of those with loans modified in the second quarter could not keep up with payments within six months, according to U.S. Comptroller John Dugan, who spoke at a housing conference.

For many of those who took out subprime loans, the homes were so far beyond what they could actually afford, that even with loan modification, the loans cannot be kept up. Loan modifications were handled in a remarkably poor fashion: deferments masquerading as modification, tacking missed payments and interest to the end of the loan and other problems have reduced the effectiveness of many loan modification programs.

Some loan modifications merely extended the teaser mortgage rate by six to 12 months. Others put on an interest rate freeze that will last longer — but the results will be the same. Once interest rates are re-set, we’ll be right back at this point. Delaying the inevitable won’t help anyone in the long run. Well, except mortgage lenders that can squeeze a little more out of their borrowers before they fold.

Another problem with loan modification was that earlier this year concerns about unemployment had yet to surface, and the global financial crisis had yet to strike hard. As a result, even though some may have been able to afford the new payments, they no longer can, thanks to current states of joblessness (another Extreme Home Makeover house in foreclosure trouble illustrates this point). Rising unemployment as companies go down will only accelerate the foreclosures, no matter how much loan modification is practiced.