Over the last few weeks, mortgage rates have begun to rise. In hindsight, it looks like the rock-bottom rates of March spurred an increase in new applications, which well exceeded the increase in “supply” that the Fed had attempted to provide. Those who tried to time the market are naturally kicking themselves; by waiting, they may have cost themselves thousands of dollars over the life of the loan, assuming that rates don’t go back down.

If you fall into this category, don’t despair! It’s still possible for you to make refinancing financially worthwhile. The goal is to offset the higher interest rate by finding other ways to save money. Of course, it requires you to be creative- not to cut corners, just to take advantage of opportunities to achieve piecemeal savings.

Let’s start with closing costs. First of all, you should ask for the “reissue rate” when renewing title insurance, which is fair since a transfer of title is not necessary. As long as you’re not pulling money out during the refinancing, you should also be able to skimp on the appraisal. Rather than forking over a thousand dollars for a dubious official appraisal, why not settle for a simple one? You might also be able to forgo a credit check, since the lender should be “intimately familiar with your payment record.”

Speaking of the lender, you might be able to save money by refinancing with your existing lender rather than seeking out a new one. Also, you might want to roll your closing costs into the loan to avoid making an upfront payment. However, be advised that this is typically cost-effective only if you plan to remain in your home for only a few more years, in which case the closing costs can be repaid in full together with the mortgage.

Finally, there are a couple of tax benefits that you may not be aware of. First, you can deduct the points you pay on the mortgage. In the case of a refinancing, “instead of writing off those points all at once, you must spread the deduction over the life of the loan…If you refinance that mortgage again, though, you can generally deduct the remaining points in the year that your loan is paid off with the second refinancing.” In addition, you might be eligible to deduct the private mortgage insurance premium, applicable to mortgages involving a down payment of less than 20%. If you refinanced after 2007 and itemize your deductions, there is a good chance you qualify.

Even if you can’t achieve any of these additional savings, you shouldn’t rule out a refinancing. Generally speaking, it probably makes sense to refinance if closing costs can be fully “recouped” after a couple of years of lower monthly payments, although naturally this calculation can become more complicated if you alter the terms/structure of the loan.

For more information, please review the May 15 post, entitled Refinancing: Fees/Taxes Versus Interest Rate Savings, and make use of the Mortgage Refinance Calculator.

In a noble effort to stem the rising tide of foreclosures, “President Obama’s Making Home Affordable program is attempting to help as many as 9 million U.S. homeowners refinance or modify their home loans.” The program has already proved to be a huge hit among homeowners, which have rushed to banks to take advantage. The US Treasury Department, armed with $75 Billion, is also doing its part to make sure that lenders are properly incentivized.

In the month of April alone, 127,000 mortgages were modified. If you include repayment plans (categorized separately from loan modifications for statistical reasons), the number rises to 270,000. Bank of America alone – via its now-defunct Countryside Financial unit – has already logged 50,000 modifications, with another 350,000 remaining- if it fully honors the terms of a legal settlement, that is.

Loan modifications work as follows:

“To qualify, mortgage holders must be an owner-occupant of a one- to four-unit property. The loan must have been originated on or before Jan. 1 and has an unpaid principle balance of no more than $729,750 for one unit properties –higher limits apply to multiple units. The mortgage payment must exceed 31 percent of gross monthly income, and the payment is not affordable because of a change in income or expenses.”

Once the terms are met, “Borrowers must make three months of timely payments before they qualify for federal aid, which will keep their interest rate as low as 2 percent for five years.” Participants are naturally advised both to be on the lookout for scams and to be aware that loan modification is not a given, and that in most cases lenders will only reluctantly agree to do so.

The unfortunate contradiction in this program is that for most homeowners, a loan modification does not get to the heart of the problem; home values have fallen so much and economic conditions remain so abysmal that a slightly lower monthly payment isn’t ultimately enough to make a difference.

According to Fitch Ratings, a “conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change.” Sure enough, the record number of loan modifications has also been accompanied by a record number of foreclosures, with “3.85% of all mortgages somewhere in the foreclosure process at the end of the first quarter, compared with 3.3% in the fourth quarter.”

Still, qualifying homeowners need not be discouraged. The flip-side of this grim statistic is that 25% of homeowners avoided foreclosure in the near-term after modifying their mortgages, right? I would encourage you to check out Making Home Affordable, HUD, and the Homeownership Preservation Foundation for more information and/or to see if you qualify.

In the eyes of President Obama and the Federal Government, one of the keys to simultaneously revive the housing market and stimulate the economy is to encourage first-time homebuyers. Towards this end, the government has now approved two tax benefits, designed to make it easier and more affordable for this segment to wade into the market.

“The first (2008) credit could be as high as $7,500 for a couple filing joint tax returns, and the second tops out at $8,000. Both are available to qualified homebuyers who have not owned a home within three years of the following purchase dates,” and who earn below a certain income threshold that varies by filing status. The 2008 credit is “structured as a long-term interest-free loan,” whereas the 2009 credit is realized in the form of savings from tax deductability. With both programs, participants are required to remain in the house for a certain period of time in order to avoid penalties. This stipulation is intended to deter speculators.

Furthermore, the Federal Housing Administration recently announced that first-time homebuyers expecting such a tax credit will be “eligible for bridge loans or cash advances up to $8,000 that they can use for the down payment, closing costs or other loan expenses pending receipt of their tax credit check from the IRS.” In this way, such homebuyers can make use of the tax credit before they have actually received a check from the government.

There is already some (indirect) evidence that these programs are working. In the first quarter of 2009, first-time homebuyers accounted for a whopping 455,000 sales. “One housing-market watcher believes first-time buyers soon will account for half of the area’s home sales.” Obviously, there are other compelling factors for purchasing your first home now, besides government tax credit. According to a recent survey, “86 per cent of potential first-time buyers say low interest rates make them more likely to purchase a home and 81 per cent say lower housing prices are a factor.”

Experts agree that first-time homebuyers are especially susceptible to misunderstandings in the mortgage process. Accordingly, “Susan Keating, president of the National Foundation for Credit Counseling, thinks that all first-time home buyers, along with anyone else taking on a non-traditional mortgage, should be required to take a financial counseling class.” The goal is to make sure consumers understand what their getting into, in order to minimize surprises and even to save money in the process.

Over the last few months, a wave of prognosticators has attempted to predict when the housing market will recover. Here at the Mortgage Blog, we have taken it upon ourselves to assemble all of these predictions:

The Department of Housing and Urban Development (HUD) is probably the most high-profile group to issue an optimistic forecast for 2009. It sees signs that the housing market is already stabilizing and will beat a path towards partial recovery as soon as the second half of 2009. Alan Greenspan, former Chairman of the Federal Reserve Bank, is equally optimistic: ” ‘We are finally beginning to see the seeds of a bottoming‘ in the housing industry,” he offered recently. Real estate mogul Sam Zell also forecasts an uptick sometime this summer.

ZipRealty is focusing on the inventory side of the equation. The organization sees a direct correlation between declining inventory levels (to eight months, down from 11) and a stronger market. “The fact that inventory is declining is suggesting that soon we will see home prices begin to stabilize. In some markets it may begin to turn upward.” However, this logic is contradicted by a recent survey, which determined that inventory is being held artificially low by sellers trying to time the market. “With almost a third of homeowners poised to jump into the market at the first sign of stabilization, this could create a steady stream of new inventory adding to already record-high inventory levels, thus keeping downward pressure on home prices.”

According to Fitch Ratings, meanwhile, “Home prices won’t stabilize until late 2010 and will fall another 12.5% from the end of 2008….The new estimate puts home prices falling to early 2002 levels, while they’re currently at values seen in mid-2003. Home prices have already declined by 27% nationally, according to the ratings agency, and the revised estimates would create a 36% decline from the housing market’s peak in 2006.”

All of the forecasters insist that national trends and averages mask large regional discrepancies. This is manifested by a recent WSJ survey (well worth a look), which shows how inventories and prices are fluctuating unevenly in different areas. The Concord Group, a real estate advisory firm, is drilling down even further, by looking just at the market for newly-built single-family homes. It predicts that the most hard-hit areas won’t recover until 2015!

Let’s forget about the experts; how do home-owners feel? According to Zillow.com’s quarterly Homeowners Confidence Survey, “Roughly a third of homeowners…in the Northeast believe the value of their little piece of the market is headed up, up and away over the next six months. By contrast, just 23 percent saw it falling.” While such optimism is not to be discounted, the same survey demonstrated that most homeowners still aren’t aware that housing prices have fallen over the last year, which makes the rosy forecast seem somewhat dubious.

And what about the numbers? Perhaps the most famous index (Case Shiller) suggests that housing prices will soon revert back to their inflation-adjusted mean.

The term affordable housing has very different connotations, depending on what side of the debate you happen to fall on. If you’re an advocate, you probably see it as an equitable way of providing shelter to low-income families. If you are a critic, you probably see it as prone to abuse, and resulting in increased costs for homeowners and businesses that don’t qualify as low-income.

The purpose of this post is not to further debate the merits of such programs, but rather to provide a basic understanding of how they work. Affordable housing generally comes in one of two forms: subsidized rentals or homeownership opportunities, respectively enabling participants to either rent or buy a home at a below-market rate. This is pretty self-explanatory.

Typically, developers are required by the city to set aside a certain number of units as affordable housing, through mandatory inclusionary zoning rules. Properties-for-sale are then sold at-cost and/or with reduced down-payments and subsidized mortgages are provided to qualifying buyers. This is usually handled through a lottery system, especially when demand exceeds supply.

The catch is that “The income-restricted units have limits on resale prices, too, allowing sales at only the inflation-adjusted purchase price to keep them affordable for decades to come.” This rule aims to close a loophole which previously allowed speculators to purchase homes at reduced prices and flip them at market rates for an immediate profit, a common practice during the real estate boom.

Both because of this potential for exploitation and because it’s difficult for many low-income buyers to come up with enough cash to make a downpayment, many municipalities are turning to subsidized rentals instead. In this case, the building owner can collect a rent that is below market rate, and the rent can only be raised by small increments. In addition, public money is often available to tenants that wish to buy and renovate their units.

It’s important to remember that the term “affordable” is entirely relative. While paying a reduced price for a unit in a nice building or area could save you money relative to what others are paying, you still might end up paying more than you would by buying/renting at market-rate in a slightly less desirable area nearby. Regardless, if you want to see if you qualify for affordable housing and/or what kinds of such properties are available, the best approach is simply to contact your municipality/state’s department of affordable housing. Nowadays, many of these departments maintain proper websites. Combined with the fact that the recession has reduced demand, affordable housing is now easier than ever to find!

A smattering of mortgage-related headlines from the previous week tell complete different stories: “Mortgage Rates Tick Up;” “Mortgage Rates Fall Again;” and “Mortgage Rates ‘All over the Map.’ ” With such a disparity, it’s hard to make heads or tails of the situation.

In the end, all of these stories are accurate. The discrepancy can be explained both in the source of the mortgage data and by the time period implied by the comparison. For example, two different mortgage surveys revealed an average 30-year fixed rate of 5.24% and 4.82%. That’s a pretty sizable difference, and would amount to thousands of dollars over the life of the mortgage. Meanwhile, comparing mortgage rates to where they were last week yields a different result than comparing to last month, let alone last year. I think the most meaningful headline, then, is the one that I chose for this posting: “Mortgage Rates Remain Near Historic Lows,” which is true regardless of which data source you quote.

Jumbo mortgages, meanwhile, are currently being priced at 6.37%, on average, which unbelievably, is less than what you would have paid for a conforming loan only one year ago. The 15-year fixed rate is hovering around 4.5%. The spread to the 30-year fixed rate appears to have shrunk recently, in proportion to a similar tightening of the yield curve for US Treasury securities, upon which mortgage rates are usually derived. Based on the chart below (courtesy of the WSJ),you can see that the 1-year ARM rate has remained close to the 30-year fixed rate, with the exception of a brief spike during the stock market collapse last September. It, too, has trended downward recently.

There are generally a few factors which have coalesced to bring down mortgage rates. First of all is slacked demand. “Moody’s chief economist John Lonski notes that they [rates] have not have fallen by enough to stabilize home sales,” and that “fears of home-price deflation and worries about future employment and income “still outweigh near record high levels of home affordability.” In other words, low rates or no low rates, mortgage demand remains weak because the housing market is weak. In fact, most of the current demand for mortgages is coming from re-financings as opposed to home-buying. This is no mystery, since rates have fallen so precipitously that it would probably already be economical to refinance even if you’ve only held your mortgage for one year or so.

Rates are also being held low by the activity of the Federal Reserve Bank, which as part of its quantitative easing program, is purchasing hundreds of billions of dollars worth of mortgage-backed securities. This has made investors comfortable again with the notion of buying such securities, because it knows that the Fed is propping up the market.

You’re probably wondering: ‘Will these trends continue?’ and, by extension, ‘Will mortgage rates continue to remain low?’ Unfortunately, no one can answer these questions with any meaningful degree of accuracy. I will say that while it’s possible that mortgage rates won’t rise much until the economic recession heals itself, it seems unlikely that rates will remain low for much longer. This is not to be construed as an exhortation to run out and buy a mortgage or to refinance your existing mortgage, but at the very least, it’s a slight nudge towards paying attention to context; the average 30-year fixed rate has remained below 5% for an unprecedented 10 weeks, hint hint.

I would also caution you against trying to time the market. It doesn’t work for stocks, and it certainly doesn’t work for mortgage rates. You could get lucky by waiting a few weeks, and lock in an even lower rate. Then again, you could end up paying a substantially higher rate, if the market changes next week. While everyone wants to avoid “mortgage remorse,” just remember that it will hurt more to pay thousands because you waited than to have missed out on the possibility to save just as much because you got lucky and rates declined.

In a simple world, mortgage points wouldn’t exist. They were invented by the mortgage industry ostensibly to give you more options when taking out a mortgage. In actuality, they function mainly to increase certainty (you are essentially increasing the size of your down payment), and hence the bank’s profits.

Simply stated, a mortgage point represents 1% of the mortgage amount, equivalent to prepaid interest. The idea is that by paying upfront discount points to the broker, you can achieve a rate below par -  that which a borrower of similar circumstances/creditworthiness could expect to pay. On the surface, this seems like a great deal, since you only have to pay the discount points once, and you get to realize savings in the form of lower monthly payments for the entire duration of your mortgage.

Of course, there’s no such thing as a free lunch. The points will have been calculated very precisely by your mortgage originator based on his required rate of return. In other words, he makes an assumption about the return he can achieve on your upfront payment, such that if invested properly it will offset the lower mortgage payments he will receive from you. Naturally, you want to attempt to back out this rate of return, in order to determine whether the savings are sufficient enough given the number of points you are being charged. In other words, if you simply took the additional upfront payment and deposited it in a savings account, would it return more than what you otherwise would have saved by paying points?

The simplest, and perhaps most useful points calculation is that of the “break-even point.” This is the number of years it will take you to recoup the outlay of points, in the form of savings on your monthly mortgage payment. For example, if you are paying 1 point on a 500,000 mortgage ($5,000), it will take you 10 years (120 months) to break even if you can save $40 a month. Whether or not you think this trade-off makes sense depends largely on how long you anticipate staying in your house. It also depends on whether you can afford the additional upfront costs. For most people, a couple points won’t break the bank, but those who are having difficulty scraping together enough cash for the down-payment probably won’t want to even thinking about paying points, regardless of whether it saves them money in the long-term.

One important consideration when paying points is tax deductiblity. Discount points are considered prepaid interest by the IRS, and are thus fully tax deductible (like normal mortgage payments), as long as certain conditions are met and you didn’t borrow money to pay the points. Origination points, on the other hand, represent normal closing/settlement costs (The IRS lists “appraisal fees, inspection fees, title fees, attorney fees, or property taxes” as examples) and are not tax-deductible.

Consider this post a continuation of yesterday’s post, both of which aim to educate you on your rights as a (potential) mortgage borrower. Much like you are entitled not to be discriminated against, you are also entitled to honesty. Towards this end, the Federal Reserve Bank recently revised the Truth in Lending Act in the form of the Mortgage Disclosure Improvement Act.

Under this rule, “creditors must give so-called ‘early disclosures,’ or good faith estimates of mortgage loan costs, within three business days of receiving an application and before collecting any fees from a consumer in accordance with the Truth in Lending Act (TLA)…The final rules also require creditors to wait seven business days after they provide early disclosure before closing the loan and to provide new disclosures with a revised annual percentage rate (APR) — and wait an additional three days before closing — if any change occurs that makes the original APR inaccurate.”

Formally taking effect on July 30, 2009, the rule takes power away from banks and mortgage brokers and returns it to mortgage borrowers, by making the mortgage process more timely and straightforward. Consumers are now legally entitled to good faith estimates within mere days of filing a mortgage application. This is a reasonable requirement, since mortgage applications are inherently time-consuming, and can damage one’s credit score when a credit report is pulled.

When applying for a mortgage, it is recommended that you seek estimates from at least three potential brokers/banks, even if such banks discourage you from doing so. Under the amended rule, you will now be able to review/compare the resulting estimates almost immediately, in order to make an informed decision about which mortgage is most competitive.

Furthermore, mortgage providers will be barred (via a 1-week moratorium) from trying to pressure you into closing right away. During this period, it goes without saying that you should review the terms/costs of each mortgage very carefully. Before agreeing, make absolutely sure that there are no junk fees and questionable terms; signing your name will essentially commit you to the loan, regardless of whether the mortgage is actually fair. In other words, this rule change won’t protect you from exorbitant fees if properly disclosed and consented to. Pay special attention to ‘processing’ and ‘administrative’ and ‘transfer’ fees, which are almost always bogus.

Bank of America is among the banks taking the lead in implementing the Fed’s new disclosure requirements. Its website includes a home loan guide, and its new disclosure forms aim to explain mortgage terms in plain English, minus the legal jargon and fine print. Fees and costs should be broken down explicitly, along with broker commissions.

Meanwhile, “If the borrower has applied for an adjustable rate mortgage — where the rate varies, typically after a set period of five or seven years — the summary discloses the maximum possible monthly payment.” Personally, this strikes me as very reasonable, considering that the subprime crisis was at least partially caused by overly optimistic assumptions about adjustable rate mortgages. Specifically, holders of such mortgages assumed (and/or were misled into believing) that interest rates (and hence their monthly payments) wouldn’t rise much from the initial low base. When rates rose, naturally, many such borrowers were caught off guard.

It’s impossible to predict the extent to which other banks will follow the lead of BofA. Given the extensive fallout from the real estate crisis (now measured in Trillions of Dollars), however, it is probably now in the interest of banks, themselves, to make sure that consumers understand the terms of their mortgages. While banks are no doubt profit-maximizing, it is still in their best interest to avoid foreclosures by making sure that borrowers can ultimately repay their loans.

According to the National Fair Housing Alliance’s annual report, housing discrimination is on the rise. “Last year, 30,758 complaints of housing discrimination were filed, a nearly 14 percent increase from the previous year, and the highest number filed in a single year since the Department of Housing and Urban Development (HUD) started keeping track in 1990.”

While most people are probably only vaguely aware that housing discrimination is illegal, few can be expected to understand exactly what is stipulated by the law. Simply stated, “The Fair Housing Act prohibits housing discrimination on the basis of race, color, national origin, religion, sex, familial status and disability.” The latter two- familial status and disability- may come as a surprise to those on the selling/renting end of the transaction.

To be clear, it’s against the law to not sell/rent out to someone simply because they have kids. From the standpoint of disabilities, not only can you not exclude the blind, deaf, handicapped, but also you are expected to make special accommodations for such people, such as allowing a service animal (even when pets are forbidden to other tenants) or facilitating wheelchair accessibility. “People think, ‘If I treat everybody the same, it’s OK, I’m not discriminating.’ You have to do something different with the blind person,” informs one expert.

In addition, “Research and investigations continue to show that some real estate agents engage in racial steering — a practice that keeps buyers from even viewing homes in neighborhoods where their race does not predominate.” A similar phenomenon is known as red-lining, which involves denying mortgages to those wising to buy in minority areas.

The law, naturally, also applies to mortgage transactions. This facet is gaining more attention in light of the subprime crisis, which is disproportionately affecting minorities. “27.6% of home purchase loans issued to Hispanics in 2007 and 33.5% of the ones issued to blacks were higher priced loans, compared with just 10.5% of home purchase loans obtained by whites.”

The New York Times recently reported that, ”A study released this week by the Pew Research Center also shows foreclosure taking the heaviest toll on counties that have black and Latino majorities, with the New York region among the badly hit.” The charge is that such minorities were unfairly steered towards subprime loans, although it’s not clear from the report whether that necessarily increased the likelihood of foreclosure.

During the expansion, this was considered a boon for minorities, who swelled among the ranks of homeowners like never before. According to the Pew report, however, minorities “Although minorities benefited the most from the surge in home buying after 1994, they also lost more in the post-2005 slump.” In other words, the areas where subprime loans predominated where also areas heavily populated by minorities.

It’s difficult to tell whether this inherently amounts to discrimination, but the important thing is that you know your rights as a homeowner/renter, and also that you stay on the right side of the law as a seller. If you feel you have been the victim of discrimination, you may want to consider filing a complaint with your local nonprofit fair-housing center.

As part of the Federal government’s plan to prop up the housing market and save the ailing economy, nearly $1 billion will be pumped a relatively obscure product known as a reverse mortgage, which allows seniors over the age of 62 to draw down the equity of their home. Under the new rule, HUD can now insure reverse mortgages up to $625,000, compared to $363,000 in 2008. Meanwhile, many states are rushing to pass similar legislation, both to make it easier for seniors to tap what for many of them is their largest source of equity, and to simultaneously prevent dishonest mortgage brokers from ripping them off in the process.

Despite superficial similarities, reverse mortgages are different from negative amortization mortgages and home equity loans, in that the loan does not necessarily need to be repaid directly by the borower, and there is no risk of foreclosure. Here’s how it works:

 ”Senior homeowners…receive proceeds from a lender — either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. Interest is  charged on the amount drawn, adding to the original amount and, thus, negative amortization. The borrower makes no monthly payments and cannot owe more than the value of the  home. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is due and repaid.”

Since there’s no exchange of title, it is the lender who bears the greatest risk, which is that the price of the house will decline below the value of homeowner equity. For this reason, most loans are limited to 50-60% of equity.

Reverse Mortgages are slated to become increasingly popular for a couple of reasons. First of all, retirement accounts have been devastated by the credit crisis and lower stock prices. In addition, layoffs caused by the economic downturn have created massive uncertainty, especially for those on the brink of retirement. Many have turned to reverse mortgages to lower their monthly mortgage payment (this is an option for those who still havn’t paid down their original mortgages) and free up cash for healthcare expenditures, etc. The result is that, “The National Reverse Mortgage Lenders Association expects 150,000 such loans to be made this year, up 30 percent over last year.”

The main drawback is probably the high upfront costs: “Taking out a reverse mortgage entails all the closing costs — origination fee, title, appraisal and the like — of a regular mortgage, plus specific fees, such as a monthly service charge.” Not to mention the reverse mortgage insurance premiums. Fortunately, origination fees are now capped at 2%, and almost all the fees can be financed into the mortgage. Still, these costs are significant and will be reflected in the payment(s) you receive.

Another drawback is that many unscrupulous mortgage brokers require borrowers to purchase an annuity at the same time as closing on the reverse mortgage. State governments are moving to ban this “cross-selling,” but it’s still possible that you will be cajoled into it. This isn’t to say that annuities are inherently inappropriate in this situation, but it’s still important to separate them from the reverse mortgage component.

In the end, only you can decide whether a reverse mortgage is appropriate for you. For more information, check out this great guide published by the AARP.