Getting a mortgage in 2009
With the struggling economy and the declining housing market all over the news, it might surprise you to learn that now is a great time to get a mortgage. However, if your credit is bad, you probably won’t qualify. Borrowers with decent credit can get a great deal on a 30-year fixed-rate conforming mortgage. To qualify, you’ll need a good FICO score, a reasonable debt load, and proof of continued income.
Mortgage rates are likely to drop further in 2009, raising the question of whether to borrow now or wait for an even better rate. Mortgage experts tend to disagree on this issue. In simple terms: if you like to gamble, then wait. If you lose sleep at night worrying that rates will soon go up, then borrow now.
Here are some things to consider about the current mortgage market:
Comparison shop, especially now
In a typical economy, one loan is pretty much the same as any other, with most interest rates on 30-year fixed loans clustering around a quarter of a percentage point. This is not so today. With the uncertain economy, lenders vary greatly in terms of how much risk they are willing to take when lending money. That’s why it’s important to shop around. You’ll want to keep checking back often, as home loan rates change all the time.
Lock in a fixed rate for new loans
Ignore what you might have heard in less troubled times about the pros and cons of fixed versus adjustable rate mortgages. Today, you’ll always get the best deal on a fixed-rate loan, because this is the financial market Congress has designated for your support. The time for securitized adjustable-rate mortgages is over, so most banks don’t want to originate ARMs. Lenders no longer offer attractive rates on these risky loans.
Keep your ARM, for now
If you already have an ARM that needs to adjust to the interest rate soon, you don’t need to rush to get rid of it. Short-term interest rates have sunk so low that you may actually see a reduction in your monthly payment. The yield on one-year Treasury bills has fallen to less than half a percent; So even if your ARM is indexed to a one-year Treasury bill, you’ll likely only pay about 3.25% per year. ARMs that are indexed to LIBOR are adjusting to the low 4% range, which is also a great rate.
control your finances
Getting one of those attractive low-interest fixed-rate loans is hard, because Fannie Mae and Freddie Mac have made the standards even tougher for the loans they’re willing to buy or guarantee, even though both megalithic mortgage finance companies they are now under government control.
Your FICO score should be at least 720 to get the best interest rate possible, although for a high enough fee, both Fannie and Freddie will guarantee loans up to FICO scores of around 600. You may also need a 20% down payment. %.
One of the biggest hurdles for many buyers has been lenders’ tightening of debt-to-income standards. Monthly mortgage payments cannot be more than 28% of gross income for Fannie or Freddie conforming loans, and all monthly debt payments combined (eg, student loans, auto loans, revolving credit accounts, etc.) cannot exceed 36% of a borrower’s gross income.
For a loan guaranteed by the Federal Housing Administration (FHA), these figures are 29% for mortgage debt and 41% for combined monthly debt.
Consider carefully whether to refinance now
Deciding when to refinance comes down to how willing you are to accept a certain amount of risk. Using one of the many online calculators available can help you do a good analysis. A good rule of thumb is that refinancing is a good option if the new interest rate is a full percentage point below what you’re currently paying and you don’t plan to move any time soon.
The argument for waiting to refinance is that the Federal Reserve and the Treasury Department are hell-bent on lowering mortgage rates even further in 2009, and they are likely to get away with it. This means putting pressure on banks to keep lowering interest rates; not only in mortgage loans, but also in all types of personal loans.
On the other hand, while it seems like a reasonable prediction that rates will fall further, nothing is guaranteed. Rates have plummeted so fast that trying to wait for a bottom may be a mistake. If the numbers work for you, you really can’t go wrong deciding to refinance now.