Ever since the financial crisis, home mortgages have gotten a lot of attention as an incredibly important component of homeowners' overall personal financial situation. With homes representing the bulk of personal wealth for millions of families, making the right decisions about getting mortgage financing for your home is crucial to ensure your financial stability.
In order to make the best decisions, you need to know the hot-button issues that are affecting the mortgage industry right now. With the three tips you'll find in this article, you'll get guidance on three important topics that have made news lately.
1. Should you use an adjustable-rate mortgage?
With interest rates on fixed mortgages at rock-bottom levels, you may wonder why anyone would use an adjustable-rate mortgage right now. After all, with the latest Federal Reserve meeting minutes showing what could be a budding disagreement among committee members about when the Fed should allow interest rates to start rising, the writing is on the wall for interest rates to rise as soon as the economic recovery starts moving at a more rapid pace.
Perhaps because of that, the Consumer Financial Protection Bureau has come out with rules on adjustable-rate mortgages that will take effect at the beginning of 2014. Rather than having banks offer ARMs to customers based on the monthly payment that would apply at the beginning of the loan, lenders would have to have borrowers demonstrate the ability to pay based on the rate that would apply now if the teaser rate didn't apply. Still, some opponents of the measure argue that the CFPB should go further, requiring evidence that homeowners can cover what the payments are likely to rise to based on normal interest rate fluctuations.
With rates on ARMs offering little advantage over fixed mortgages, using an ARM really makes little sense unless you're certain that you'll sell the property before the initial rate on the mortgage ends. Otherwise, take advantage of interest rate certainty and lock in a low fixed rate while you can.
2. Should you pay points to reduce your rate?
Given the current interest rate environment, you don't have to work too hard to find a low mortgage rate. But if you want to go even lower, one option you have is to pay extra money up front that essentially buys you a further rate reduction. Right now, you can buy a quarter-point reduction in your mortgage rate by paying a single point, or 1% of the mortgage loan balance.
This strategy, called paying points, will reduce your monthly payment. But in deciding whether it's worth it, you also have to ask how long you expect to keep your mortgage. Many homeowners erroneously figure that if they plan to stay in their house for a long enough period, it'll automatically make sense to pay points. For instance, in the example above, the interest savings from paying a point gets you to break even after four to five years.
Remember, though, that you may want to refinance your mortgage later even if you stay in your home. So that means if you end up refinancing within that same four-to-five-year period, you'll also end up worse off.
3. How will recent mortgage settlements affect you?
Meanwhile, big banks have been resolving long-standing disputes about their mortgage practices. Two major deals include a Bank of America (NYSE:BAC) settlement with Fannie Mae to address bad loans the bank allegedly made, as well as a broader deal with the Fed and the Office of the Comptroller of the Currency that included not only B of A but also Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and several other mortgage-servicing banks.
According to the OCC, 3.8 million eligible borrowers will receive cash payments totaling $3.3 billion under its settlement with banks. But for current borrowers, the settlement will likely have minimal impact. Hopefully, though, what the settlements mean is that the loan process -- as well as any potential foreclosure process further down the road -- will go more smoothly than it did in recent years.
You can go home again
Your home is one of the biggest assets you own. By paying attention to what's happening in the mortgage world, you'll have the best chance to keep it for the long run.