The last few years have been dismal for the housing market and because of that, you may not be in the market as a buyer or a seller but someday you will and that someday may be sooner than you think. You may get a promotion, a transfer, or a new job. You may find a great deal on the home of your dreams or it may simply be time for a change.

Even if you won’t be purchasing a home in the near future, you could avoid mistake later by preparing yourself now. Most people who have purchased a home go in to the mortgage lending market with little or no knowledge of how it functions. We follow the lead of our real estate agent and end up taking their advice on what is the best option for us. We don’t do this in other areas of our life so why do we do it for what will probably be the largest purchase we make?

Let’s change that today. Let’s start learning a little about the mortgage lending market so when the time comes, you’re armed with the knowledge you need to ask the right questions.

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With mortgage rates so low, it can be a great time to refinance your home. Indeed, I am thinking about refinancing my home to save money on the payments. I wouldn’t extend my mortgage out longer; I’d just refinance for the reminder of my mortgage right now, with a lower rate. That would help me build equity faster, and it would save me money in interest charges over my loans maturity.

Refinancing can also be a good way to improve your cash flow. For those who are having difficulties, but haven’t yet missed a payment or seen a drop in credit score, it is possible to get a lower payment if you refinance to a lower rate. If you are trying to decide whether or not to save money on your home, you can do so in less than 55 seconds by answering the following questions:

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With mortgages once again at historic lows, I’ve once again considered refinancing our mortgage. A few months ago we weren’t sure how long we’d be living in our current home and so we put off refinancing, despite rates being as low as 4.75% APR. Fortune has smiled on us and rates have once again come close to those lows and I’m taking another look.

Mortgage refinancing, much like buying a home, can sometimes be a scary process because it involves what usually is the largest asset you have. That’s the case for us, our home is our more valuable physical financial asset by far, and so any decision involve something of that magnitude can be a little scary.

Fortunately, mortgages aren’t quite that complicated and there is a wealth of resources available to help you compare different offers.

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I’ve been hearing a lot about the government’s Making Home Affordable mortgage refinance program. Having looked at refinancing our mortgage a few months ago, but not pulling the trigger, I was interested to see if we could benefit from this program (we can’t, but that’s not a bad thing). It’s designed to help people get more favorable loan terms in scenarios where their home has lost value. A lot of lenders won’t refinance a loan if the value of your home is less than the loan amount, it’s simply a matter of math; this program looks to help alleviate some of that.

This program, introduced by the Obama Administration as part of the Financial Stability Plan, is estimated to help 7 to 9 million people. They estimate the Home Affordable Refinance Program will help 4 to 5 million and the Home Affordable Modification Program will help 3 – 4 million. What this means is that you should act quickly if you want your application processed quickly. The longer you wait to apply, the larger the backlog will grow, so let’s get to the program!

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When I bought my house three years ago, I used LendingTree to get some financing offers to get a better feel for what rates for someone like me. Within an hour or two of when I submitted the request, I had someone from LendingTree call me to tell me they were coordinating the lending offers. Within an hour of that I had a response from LendingTree that included several rate quotes from multiple lenders, I was genuinely impressed with how quickly that process was.

Today was a totally different story. I submitted my request in the morning and it wasn’t until 5 PM that I saw some “quotes” roll in. I put that in quotes because it was one lender with three quotes depending on what loan I wanted. By then I had talked to a local lender and a loan officer from BB&T, where my current mortgage is. The loan offer was from a lender in Kentucky and it was far inferior to the one offered by BB&T (the local lender will get back to me tomorrow). Maybe it’s because we’re so close to the holidays, maybe it’s because we’re in a sagging housing market, or maybe because I’m a weak borrower, but it’s overall a pretty lackluster response.

Here are the offers so far on the table (obviously pending credit checks and whatnot):

• BB&T Mortgage said that I could get a 20 or 30 fixed year mortgage at 4.875% or a 15 year mortgage at 4.75%, with no points. The closing costs, which would include all the document fees, escrow setup, and title insurance BS would run about $3,100 to $3,200.
• SurePoint Lending had three offers – $4.875% on a 30 year fixed with one point, 5% on a FHA 15 year fixed with no points, and 5.25% on a 30 year fixed with no points.

Assuming the closing costs are going to be similar, the SurePoint offer doesn’t come close to the MM&T Mortgage and I’m inclined to stick with the bank I’m already with. I didn’t set up my loan with BB&T, they bought it, but I haven’t had any problems and they’re offering a much cheaper option.

Perhaps tomorrow will bring more quotes but I’m not holding my breath, it looks like the number to beat is 4.875% with no points.

I just got off the phone with Patty at BB&T Mortgage, who walked through all the options I had with them with regards to my mortgage. She was extremely courteous and explained everything in great detail, great loan officer. The one big bit of advice I learned was that a loan modification isn’t what I thought it was. Loan modifications, at least by BB&T’s definition, are for scenarios in which you want to change the amortization of your loan and thus your payments, they don’t affect the interest rate on fixed loans. I was reading Jonathan’s post about his refinancing/rate reduction experience and somehow managed to get it in my head that he did a loan modification, but he just got a rate reduction from his bank. (It would be nice if BB&T would just ask for $500 and drop the rate!)

We only talked about it briefly but loan modifications are for when you want to change one or more terms on the loan and can only lower your interest rate if you have an adjustable rate mortgage. There are cases where loan interest rates can be modified as well but those are usually for when you can’t make payments, they won’t just drop it just because you ask nicely (too bad). In my situation of having a fixed rate mortgage, a loan modification wouldn’t help me. The only thing I could do is pay a big chunk of principal and have the loan re-amortized.

So option one of a loan modification is out but the rate I was quoted from BB&T for a refi is 4.875% APR on either a 30- or 20-year fixed with closing costs of around $3,100 to $3,200.

The game continues!

When the Fed dropped its target federal funds rate to 0.00% – 0.25%, one of the other things it said was that it would be buying up long term debt. This, coupled with other moves, has pushed mortgages rates down to the lowest I’ve ever seen in my entire life. Wells Fargo has 4.875% APR listed as its 30 year fixed rate (as of Dec 22, 2008). When I heard about an earlier Treasury plan to take action that would lower interest rates on mortgages to 4.5%, thoughts of sugar plum refinancing fairies danced in my head, but I was reminded of how that was only for new mortgages. The Fed has opened the door for refinances too.

The rule of thumb in refinancing has always been that you don’t want to try it unless the rates differ by a percent or more, it looks like we’ve hit that sweet spot to at least warrant investigation.

Our Mortgage Situation

My current mortgage is $217,488 at 5.875% APR with BB&T and we’re about three years in with minimum payments of $1714.85 a month. Our appraisal was for $299,999 so our current loan to value is 72.5% and we have flexibility to get that value lower. Our home, very fortunately, has not lost value compared to homes sold around us. In fact, in the same strip of townhouses, two homes sold for more than our appraisal price (by about 5-7%) so I conservatively think our house has kept its value despite home prices falling nationally.

Our Strategy

My approach to this will be to check what the actual prevailing rates are by putting in a request with LendingTree, then calling up BB&T to see what my options are with a loan modification, then calling up a few mortgage lenders I know to see what their best deals are. My preference is for a loan modification because those are the cheapest, my number two is working with local lenders because I’ve done so in the past and they’ve been awesome, and the third option is with a “stranger” lender via LendingTree. LendingTree is there mostly to give me a baseline idea of what I should be able to get but you never know what can happen.

I’ll be working on this most of the day and as I make these calls, I’ll write posts throughout the day with updates (and post them to Twitter). If you have any words of wisdom, please let me know either here in the comments, email, or on Twitter. Already, jeffrosecpa told me that some of his clients were getting 4.5% 30-year fixed mortgages with 60% LTV… that’s not bad!

(Photo: thetruthabout

The Treasury Department is working on a plan that would lower interest rates on 30-year fixed mortgages to 4.50% APY. They would do this by purchasing mortgage backed securities from Fannie Mae and Freddie Mac, thus increasing demand and forcing mortgage rates down. Regardless of what you feel about this plan, the thought of 4.50% APY mortgage interest rates should appeal to anyone who owns a house or wants to own a house in the next few years. 4.50% APY is an unheard of rate for a thirty-year fixed mortgage, taking advantage of it could leave you smiling for years when you look back at how you made lemonade out of all these economic lemons.

My advice for anyone who seeks to take advantage, start saving now. You’ll want to save up your war chest for either the refinancing closing costs or the home purchase closing costs. Either way, you want to be in a position to take advantage should this plan go through.

Refinancing Breakeven

My wife and I have lived in our home for three years and we absolutely love it. The current interest rate on our 30-year fixed mortgage is 5.75% APR, or around 5.9% APY. Should Treasury push rates down to 4.50% APY, it would seem like a no-brainer for us to refinance, assuming reasonable closing costs.

I entered in some data into Dinkytown.net’s Refinance Breakeven calculator (assuming only 1% for closing costs, which matches some quotes online) and the results were good. After eight months, the money saved on my lowered monthly payment would exceed the closing costs. After sixteen months, the money saved after payments and interest payments exceed closing costs and what would’ve been saved prepaying the mortgage. The sixteen months is the figure I’m most interested in because it takes into account how we went from a 27 year mortgage all the way to a 30 year mortgage. Seems great right?

Looking at the refinancing summary (after you click “View Report”), I see that I only save $4,680 in total interest across thirty years. That was surprising. Saving $5,000 over thirty years isn’t worth the hassle of refinancing, so I changed the loan terms to a 15-year fixed with the same interest rate. The sixteen months from before dropped to 15 months (not surprising because the payment amount goes up) but the total interest saved is over $100,000. The monthly payment goes up a little bit but it actually matches how much we pay currently, so we may consider refinancing to save that $100,000.

Several things worth mentioning:

• This is just an estimate, I think that if you are serious about it then you should get some actual quotes with real closing cost figures. Is 1% too low? Is it a reflection of how an online quote is sometimes just a way to get you on the phone with an agent?
• The Treasury plan only talks about 30-year fixed mortgages but I’d imagine 15-year fixed mortgages would drop too. Despite the calculations I made that confirmed a 15-year mortgage is the same as a 30-year mortgage with extra payments, having a 15 year on the books seems to “force” the prepayment, thus forcing the interest savings.
• We may or may not be living in this house for the next fifteen or thirty years. However, we shouldn’t let the unknown make our decisions for us. I suspect we’ll know in the next few months whether we’d like to move and if we do, that will drive our refinancing decision should this plan drop interest rates to these great levels.

We’ll be waiting to see if this plan does lower rates and to see what our future plans are but sagging home prices and low interest rates make for a very appealing time to buy a home.