Simply The Best Loans

Adjustable Rate Mortgages have been very popular over the last few years. When interest rates are going down, they are very favorable. The most popular of these programs have been the 3/1 and 5/1 ARMs with interest-only payments.

Alan Greenspan has warned homeowners who used hybrid loan programs, which allowed for no downpayment and interest-only payment options, to purchase their homes may be in trouble with interest rates on the rise. A recent Washington Post article by Nell Henderson, overviewed Greenspan’s acknowledegment of the impact Hurricanes Katrina and Rita will have not only on the U.S. economy but on the economy world-wide. In addition, Henderson’s article references Greenspan’s comments to Japanese executives in Tokyo, which agree with predictions that higher energy costs will force consumers and businesses to cut spending.

Once consumers and businesses begin to cut spending, the economy slows. Companies may be forced into freezing wages or laying off employees. If the Fed continues to push interest rates up and inflation increases, consumer budgets will be further strained. Even with conservative estimates, those with an adjustable mortgage could be facing up to a 30% increase in their monthly payments as rates continue to rise.

Salary increases have been fairly flat in recent years. Businesses facing rising costs usually reduce spending, therefore, salaries are not likely to increase. If you’re facing the potential of an adjustment in your interest rate in the next 2-3 years, refinancing into a fixed rate now may save you from having an over-extended budget later.

For homeowners who commute 30 minutes or more to work one-way, gasoline prices have already put a dent in their discretionary income. As the costs other goods and services continues to increase due to higher fuel costs, budgets will tighten even further.

There is no one-size-fits-all solution to these problems but proper planning now can prevent agonizing over your bills later.

Things to consider:

1. If you have an ARM, is it already adjusting or is your fixed period going to expire within the next 2-3 years? If so, talk to a qualified mortgage professional or other financial advisor about the potential benefits of refinancing into a fixed rate now.

2. Do you have a significant amount of unsecured debt? If so, begin paying that debt down. The less unsecured debt you have the better off your long-term financial picture will be.

3. Do you have a pool of emergency funds that can cover all your expenses for several months if you have an unexpected loss of income? Pay yourself first, even if you are trying to reduce your credit card debt, make sure you are putting some money away each month for emergencies and retirement.

4. Are you expecting to fund your child’s college education? Re-consider this plan. You may be better off investigating other ways for your child to get a college education and saving for your retirement instead. There are numerous scholarship, grant and financial aid programs that can allow your child to get his/her education without you bearing the financial burden. Work-study programs also provide students with the ability to gain real work experience while paying for their education.

5. Do you have an equity line of credit? If the rate on your equity line is increasing rapidly, you may want to consider refinancing into a fixed rate 2nd mortgage or refinancing your 1st and 2nd into one loan with a fixed rate. A mortgage professional or other financial advisor can help you determine if the aggregate APR will make such a move cost effective.

6. Do you have a financial plan, goals? If you do, great, review them. If you don’t, begin establishing your goals and the plan necessary for you to meet them. Be realistic, but plan positively. Look at things like your income, debt, net worth, savings plan, retirement plan, investment strategies and seek the help of a qualified professional if you’re uncertain what to do.

7. Evaluate your current budget and spending habits. Where can you make changes that will have a positive impact on your bottom line? Knowing what, where and how you spend you money can mean the difference between financial security and financial disaster.

8. Save for what you want! Before credit was so readily available, people who wished to buy a new living room set, go on a special vacation, or purchase a new car, saved up for it. By budgeting and planning ahead, you can prevent over-extending yourself and creating unnecessary debt.

Associated Press reported Freddie Mac’s recent annoucement that 30 year mortgage rates have risen to their highest level since March. Currently at 5.98, which is up .7 percent from last week, according to nationwide averages.

Rising interest rates are the result of the Fed’s strategy to keep inflation under control. As natural disasters have severely impacted our ecconomy in recent weeks, the Fed’s strategy may not provide the expected relief. Additionally, higher rates and increased fuel costs are further eroding the discretionary income of consumers. Many are tempted to limit or put off saving due to more immediate financial pressures.

Now, more than ever, it’s time for individuals to take the long view and save for their future. While Americans commonly plan for shorter-term expenses such as college funds for their children, they routinely fail to plan appropriately for their long-term financial needs.

For further insight, read Matt Branaugh’s, article “Save for Retirement First, then for College” on www.delawareonline.com.

Personal Finance

Are you conflicted, unclear as to the direction mortgage interest rates will take? Do you wonder if Greenspan’s conundrum will continue?

Frankly, your guess may be as good as those who routinely predict these things. I’ve seen opinions indicating rates are going to skyrocket upwards to those believing bond yields will send them even lower. Overall, my best guess is mortgage rates will continue to remain reasonably stable. Why? A number of reasons.

As financial markets anticipated a higher level of economic growth, 30 and 15 year fixed rates rose during the past two weeks. Essentially, 30 year rates rose from 5.62% to 5.66% while 15 year rates went from 5.20% to 5.25%. Still, those rates are almost a half point lower than the average rates of a year ago.

The gearing up for greater growth in the economy may have been, ultimately, somewhat premature, as the softer-than-expected inflation rate report failed to boost the market.

“A further rise [in fuel prices] could cut materially into private spending and thus dampen the rate of economic expansion,” said Greenspan.

With crude oil prices averaging around $60 a barrel and showing no signs of decreasing, higher gas prices will continue to strain the budgets of both businesses and individuals. The effect is overall higher costs on all products and services which could prevent further expansion and growth in some areas of the economy.

Greenspan also said that low long-term interest rates have “continued to provide a lift to housing activity.”

During the past several years, one of the strongest areas of economic growth in this country surrounded the housing market. Low rates and flexible loan program options gave many Americans their first opportunity to buy homes. Homeownership provides a foundation for a stronger, more stable economy.

With this in mind, I believe that interest rates dropping to new record lows is unlikely, at the same time, I also feel that even as the market improves and the economy continues to stabilize, long-term rates for mortgages will remain steady and affordable.

Gail Liberman and Alan Lavine of the Boston Herald offer the following “Rules of the Road for Bond Prices and Interest Rates”:

Consider these rules when you invest in bonds.

Bond prices and interest rates move in opposite directions. Bond prices fall when interest rates rise and vice verse.

Selling a bond? The longer its maturity, the greater the price change, based on interest rates. When interest rates rise, long-term bonds lose more value than short-term bonds and vice verse.

The lowest-risk bonds, if you hold them to maturity, are U.S. Treasury bonds. Sell them early, however, and their value also fluctuates, based on interest rates.

If interest rates rise by 1 percent, here’s a general idea of how much the value of your bond may drop if you sell it.

A two-year U.S. Treasury bond:-2 percent.

A five-year U.S. Treasury bond: -4.25 percent.

A 10-year U.S. Treasury bond: A little over -7 percent.

A 20-year U.S. Treasury bond: -10 percent.

A 30-year U.S. Treasury bond: -11.5 percent in value.

Keep in mind that the interest your bond pays should offset some of the decline.

Spouses Gail Liberman and Alan Lavine’s latest book is Rags to Retirement (Alpha Books). You can e-mail them at MWliblav@aol.com.

Conundrum is defined as “A paradoxical, insoluble, or difficult problem; a dilemma.”

Since many experts are wondering how short-term rates are going up while long-term rates are continuing to remain at records lows, it’s no surprise that those of us who do not study the economy for a living find it confusing. In researching for a clear, yet concise explanations, CNN.com provided the following:

When short-term yields become higher than long-term yields, it is called an inverted yield curve. An inverted yield curve has preceded the nation’s last two economic recessions.

The Federal Reserve has boosted short-term interest rates nine straight times since last June to 3.25 percent, and the central bank gave little indication that it would pause its monetary tightening campaign when it again raised last week.

Despite those increases, long-term Treasury yields have not risen in kind and are in fact below where they were when the Fed started raising short-term rates last summer.

Fed Chairman Alan Greenspan has called that a conundrum, and economists have struggled to predict whether the Treasury market is set to tumble, which would push yields higher. Bond prices and yields move in opposite directions.

Long-term yields have remained low despite a year of fed fund rate hikes, causing short- and long-term yield levels to move closer together. This is known as a flattening yield curve.

Traders may have held onto bonds in the face of rising short-term rates because they believe the hikes mean the Fed has inflation well in hand. Inflation hurts bonds by eroding the value of the fixed-income investment.

When the yield curve inverted in 2000, two-year yields exceeded 10-year yields by a little more than half a point.

As terrorist bombs struck throughout London on Thursday, the bond market rallied and stocks dropped, yet by Friday, the Dow improved as recent unemployment rates were reported as the lowest they’ve been in 4 years. In the past, an inverted yield curve in the bond market has been followed by economic recession. While there are many factors which could reduce the possibility of recession, John Herrmann, director of economic commentary for Cantor Viewpoint, stated

“Rather than portending recession, a flat curve reflects slow economic growth in Europe and Japan, particularly in relation to stronger U.S. growth, as investors worldwide have been snapping up long-term Treasuries as a flight to quality.

“Links between global economies are stronger now, and the flat curve reflects that,” Herrmann said.

Overall, as market activity fails to follow historic patterns, it is possible new economic trends can be expected as global economic activity continues to show us “it’s a small world, after all.”

Despite the Federal Reserve’s recent increases in short term interest rates, the bond market has continued to be strong and mortgage interest rates have continue to remain at their record lows. Why?

Some reports indicate that baby boomer investors have consistently been choosing bonds over stocks as a safe investment. In the US, Europe and Japan, those reaching retirement age are buying longer-term treasuries, from 10 to 30 year bond notes. The result, an inverse movement of increased prices and lower yields.

Since bond prices and yields are the driver for mortgage interest rates, mortgage rates have continued to creep downward even as the Fed’s rate went up. Should this investment trend with the baby boom generation continue, mortgage rates could drop even more. David Rosenberg, Merrill Lynch’s chief North American economist considers this trend as having “already started. It’s a global development.”

For those of us that bought our first houses when mortgage rates were in the double digits, this is difficult to imagine. However, Stephen King of HSBC Holdings Plc in London reports, that baby boomers are “more likely to be interested in avoiding capital losses than making capital gains, pointing to a wholesale shift out of equities into bonds.”

All that being said, it seems that the fears and predictions of mortgage rates shooting back into double digits by the end of the year may have been premature.

Last Thursday, Alan Greenspan testified before the Joint Economic Committee of Congress. In his statements, Greenspan referred to the US economy as being on “reasonably firm footing”, but indicated that interest rate increases would probably continue to keep inflation in check.

Other issues identified included: imbalances and uncertainties regarding the yawning US budget and trade deficits, slow wage growth, rising oil prices, and concern that housing prices are overvalued across the nation.

However, during the same week, Greenspan also “asserted there was no national housing bubble, but that the overheated housing market is more properly described as ‘froth’.”

“There do appear to be, at a minimum, signs of froth in some local markets,” Greenspan said. He added, “the apparent froth in the housing markets may have spilled over into the mortgage markets.” And the mortgage and housing situation is “clearly without recent precedent.”

All that being said, are we bubbling or frothing?

I believe that even if mortgage rates begin to go up, the average American will be more likely to invest in a home before investing in other things. Along with the real estate boom across the country, there has been an increase in available information educating consumers of the benefits of homeownership versus renting.

Boom or bust, the average American aspires to homeownership and I don’t think that’s likely to change.

When you’re shopping for a mortgage and your financial picture requires an unusual program from a lender, you will usually find yourself paying a higher than market interest rate on the loan. Does this mean that you might have to consider a less expensive house because the loan you need has a higher rate? Sometimes.

There are programs out there for almost every borrower, even those with credit issues. What the borrower needs to realize is that for every “concession” you want the lender to make to you in underwriting, the lender wants something in return, normally higher interest.

You want a 100% financing? Fine. It can cost up to a half point or more than if you put some money down. You want interest-only payments? Okay, the lender will probably charge some additional discount fee or increase your rate. You want stated income or stated assets? The risk is higher to the lender so the lender charges more.

So many people see advertisments for a particular rate on TV or the internet and they assume, because there is no explanation on the advertisement, that it’s available to every borrower. However, what they don’t realize is, to get that rate they have to have everything the lender wants….good credit, good income, little to no debt, and plenty of assets.

I have actually had people tell me they expected to get the lowest advertised rate, put no money down, and pay no closing costs when they have no money in the bank, limited income and poor credit. It doesn’t work that way.

I’ve also had people tell me they want to buy a $300,000 house, put no money down, pay no closing costs and have a monthly payment of not more than $800. No matter how low interest rates are, this is not a feasible scenario.

So, if the mortgage you qualify for has a rate that makes the payment on the $250,000 house you want more than you can comfortably afford each month, it would be better to decide on a $175,000 house. Then you have a mortgage, save on taxes and plan to move up a few years down the road, rather than continue to rent.

When clients balk at this notion, I explain that if they buy the $175,000 house today and make $1200 a month payments, a few years down the road they will have equity in the property and have experience significant tax savings during that time. If they continue to rent for 3 years, they have gained nothing and saved nothing. In some instances, it may even cost them more.

When we shop for anything, it can be difficult to restrain ourselves from considering a purchase that is more than we can afford. Buying a house is no different. The easiest way to avoid disappointment, when what you want and what you can afford don’t match, is to get qualified BEFORE you begin to look at property.

Know going in what type loan you can get, what rate you’ll have to pay and what price range house will fit your budget on a monthly payment basis. Then only look at properties that fit your criteria. You will be happier with the results in the long run.

Remember, home ownership is a great thing, being “house poor” isn’t. You want to enjoy owning a home, not just work to make the payments on it.

Believe it or not there are times the interest rate is unimportant when you are getting a loan. Right now everyone is caught up in trying to explain what Greenspan calls the “conundrum”. The National Association of Realtors’ chief economist, David Lereah, is reported as saying,

Not only have mortgage interest rates declined, but an expected rise in the second half the year will be slower than in earlier projections.

With the rate on 30 year fixed mortgages dropping below 5.5%, almost a full percentage point less than this time last year, when would someone purchasing a new home not want to worry about the interest rate?

If you are a first time homebuyer and have been paying premium rental fees, you will save money by purchasing a home no matter if the interest rate is 5.5 or 6.5. Depending on your income and tax bracket, the interest rate would have to hit double digits for you to question whether or not you would experience savings. It is almost always cheaper to own home than to rent, especially if you earn over $40,000 a year and have no dependents.

If you have specific circumstances which make your loan program a niche item, your rate won’t be as low as current market but if it allows you to meet your overall financial goals, then you want to do the loan despite a higher rate.

I tell my clients routinely that they have to look at the big picture of what they are trying to accomplish. If the higher rate program helps them better meet their financial needs, then the rate doesn’t matter.

The Fed responded yesterday to the question concerning potential real estate bubbles breaking across the country. The past few years of record low interest rates coupled with very high appreciation, in many markets, have some analysts predicting an extreme downturn in residential housing prices as interest rates go up.

Additionally, some analysts have been predicting interest rates soaring into double digits by the end of the year. The proposed result: homeowners would find their properties are no longer valued at the price they paid and, since many purchased their homes with adjustable rate mortgages, interest-increased payments would become unaffordable.

Over the last few years, with rates dropping to record lows, interest-only loans became extremely popular. Many of my clients opted for an interest-only payment based on the assumption that rapid appreciation would create equity in the property. I have seen incredible appreciation in the area I live, with some properties doubling in value in less than ten years.

With an interest-only payment, borrowers are able to buy a much more expensive house and still manage the payments. While I don’t agree with many of the “doom and gloom” folks expecting interests rates to reach such levels borrowers are no longer able to purchase homes, I also don’t think the extreme appreciation many areas have experienced in recent years will continue.

Do I think real estate in these areas is going to depreciate? Probably not. Greenspan said yesterday that, historically, periods of depreciation in real estate values are actually very rare. So are interest-only loans a risk?

As with any other investment, the amount of risk depends on the individual. What may be very practical for one borrower could be very risky for another.

Example #1: An established commission sales person with a fluctuating income gets an interest-only loan in order to ensure in low-commission times they have least payment possible. Then, when commissions are collected the sales person pays a a lump sum directly to the principal. The sales person has figured out the amount of principal payment he/she would be making each month with a full payment loan. He/she pays that amount or more to the principal of the loan periodically. The sales person is still creating equity in the property by reducing the principal balance on the loan, but has lower payments each month. An interest-only loan in this scenario is low risk.

Example #2: The borrower chooses an interest-only loan so that he/she can buy a more expensive house. He/She has other revolving debt and little-to-no savings. The borrower is assuming equity will build in the property through appreciation, not by reducing the principal balance of his/her loan. The borrower gets transferred or loses a job after a year or so. In trying to sell the house, the borrower discovers that he/she can not sell the property for enough to cover the sales expense and payoff the loan. The borrower basically owes more than or, at best, equal to the property’s value. This is a high risk scenario.

Since no one can guarantee what future market conditions are going to be, the borrower must in all instances plan for “worse-case”. Examples of “worse-case” could be: lower than expected appreciation, interest rates adjust upward too quickly creating negative amortization, or the property has to be sold for unexpected reasons and there is no equity.

Anyone considering an interest-only loan program should discuss it with their broker and/or other financial advisors. The borrower needs to be confident that his/her reasons for chosing the interest-only program will outweigh the potential worse-case scenario. His/her financial planning should include making periodic payments to the principal balance of the loan to ensure he/she is building of equity in the property.