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Wednesday Mar 17th 2010

Fed Raises Rates, Spurs Refinance Activity
Mortgage applications for refinances and purchases increased, likely due to the Federal Reserve raising rates last week for the 15th time in a row. Homeowners with adjustable rate mortgages that will soon adjust are encouraged to seek long-term fixed-rate mortgages to avoid significantly higher rates.

Mortgage loan application volume rose for the second consecutive week, according to The Mortgage Bankers Association today in their Weekly Mortgage Applications Survey. For the week ending March 31, the Market Composite Index showed applications overall increased 7.2 percent on a seasonally adjusted basis from the previous week.
Both the Purchase Index and the Refinance Index rose from the previous week, with purchases up 8.4 percent and refinances increased 5.3 percent.
"Refinancing is likely to increase, with the Fed raising Fed Funds Rate again last week," said Bob Walters, chief economist of Quicken Loans, the nation's largest online lender. "There are about $2.2 trillion in adjustable rate mortgages that need to be refinanced as short-term rates continue to rise. By far the most significant source of refinance activity is homeowners looking to exit adjustable rate mortgages before those loans adjust to significantly higher rates. As long as long-term rates remain low and the unemployment rate holds steady, the housing market will remain strong."

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Getting a home loan can be a confusing and complicated process especially if you've never been through the mortgage process before. This Mortgage Guide tries to take some of the mystery out of the home mortgage application process. We explain in a step by step process what you need to accomplish.

Fixed-Rate Mortgages

A fixed-rate mortgage means the interest rate and principal payments remain the same for the entire life of the loan. (Taxes, of course, may change.)

Advantages include consistent principal and interest payments make this loan stable your rate won't change, so you don't need to worry about market fluctuations. A good choice if you're likely to stay in this house for a long time.

Disadvantages include a possibly higher cost - these loans are usually priced higher than an adjustable-rate mortgage. However keep in mind, most people move or refinance within seven years.

An adjustable-rate mortgage (ARM) means that the interest rate changes over the life of the loan - according to the terms specified in advance. All ARM's are amortized over 30 years.

With ARMs:

The initial interest rate is usually lower than with a fixed-rate mortgage.

The interest rate may be adjusted (up or down) at predetermined times.

The monthly payment will then increase or decrease.

Most ARM programs do offer "rate cap" protection, which limits the amount the rate can be increased, both each year and over the life of the loan.

Balloon Mortgage?

Balloon mortgages give borrowers lower rates and payments for a specific period of time, which usually is anywhere from three years to 10 years. After which, the borrower has to pay off the principal balance in a lump sum also called "balloon payment". This can be an attractive option for borrowers who don't plan on living in the property for long. A disadvantage to this mortgage option is that plans are prone to changes. If plans change, the buyer will have to pay off, or refinance balance. Under certain predetermined conditions, the mortgages can be converted to fixed-rate or adjustable-rate loans. More