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2012: The Year of the Mortgage

Written By:
January 05, 2012 at 9:50 PM

Why 2012 is the year to finally buy a home or refinance your loan

If your New Year’s Eve fortune cookie advised you to enter (or re-enter) the real estate market, it may be time to listen. Although rates have held tightly at historically low levels, impossible lending criteria and appraisals have made it difficult for the average consumer to obtain a mortgage.

However, with the dawn of a new year a light is being shed on the real estate and mortgage market that gives, “striking while the iron is hot” new meaning. Finally, consumers are seeing more opportunity to refinance or purchase a home today versus what they experienced over the past few years. Why? In addition to low rates, a flush inventory and the revision of government programs, the economy is starting to show signs of life.

The New York Times recently reported that in December sectors such as manufacturing grew at the fastest pace in six months and spending on construction projects rose 1.2% in November. Also in November, new home construction was up 9.3% from October--the fastest pace since April 2010. Jobless claims also dropped from 387,000 to 372,000 as the economy continues to regain its footing.

Most importantly, consumer confidence is up and people are spending more. According to the Conference Board, the consumer confidence index rose in December to the highest level since April. Economists have kept a watchful eye on consumer spending as it equates for 70% of the economy.

As Americans regain financial strength, rates continue to remain at an all-time low of 4.18% for a 30 year fixed and 3.40% for a 15 year fixed mortgage, making 2012 the best time to move on a home loan.

Refinancing to Lower Payments

Homeowners who haven’t already refinanced their high-interest mortgage loan should hop on the bandwagon now if they want to see long term savings. While playing “let’s make a deal” with your current lender is a good place to start, consumers should compare several loan offers and scenarios to find the best situation.

However, some homeowners may not be in the position to refinance in the traditional sense because they owe more on their home than what it is currently worth. Plummeting home values over the past three years have taken a toll on numerous properties, leaving homeowners who desperately want to refinance out in the cold.

Luckily, millions of homeowners stuck in an underwater situation may finally see relief with HARP 2.0 this year. Originally created to help struggling homeowners, the first version of HARP was stunted with numerous roadblocks for underwater homeowners due to the loan to value limit and an appraisal. Because underwater homeowners owe more on their home than what it was worth, HARP could not provide assistance.

In late fall 2011, the Obama administration announced a revised version of HARP, now referred to as HARP 2.0 that removed the appraisal process because there are no longer loan to value ratio limit constrictions, opening opportunities to numerous sunken borrowers.

According to Georgia real estate investor and columnist, John Adams, "The biggest change will allow some homeowners to refinance their homes, even though they owe more on their existing loan than their homes are worth."

Before pursuing refinancing through HARP 2.0 homeowners should confirm that their loan is owned by either Freddie Mac or Fannie Mae and must be current on their mortgage payments with no late payment in the past six months and no more than one late payment in the past 12 months.

Buying a Home

As more Americans get back to work and reclaim their lives, the desire to become a homeowner will once again be palatable. Although a rocky economy has kept numerous homebuyers away, news that consumer confidence is on the rise may get the pipeline chugging once again.

The good news is that home prices and mortgage loan rates remain low, in addition to a wide array of properties on the market. In fact 2012 may be one of the best years to purchase a home.

Greg McBride, senior financial analyst for says that 30 year fixed rate mortgages could easily remain extremely low. “We may spend the entire year below 5%.” He adds that rates could sink even lower if the European debt crisis continues to rage on.

In addition to low rates, some real estate experts are seeing a trend where lenders are more willing to work with borrowers who may have less than stellar credit.

McBride says, “I don’t see credit becoming appreciably easier. But I think what you will see is more lenders willing to dip their toes into the waters of 700 and 720 credit-score consumers. You may end up, as a consumer, seeing more lenders at the table for those that have good credit scores and not just those who have great credit scores.”

Investment or Rental Property

Investment in real estate, especially in rental properties in desirable areas continues to show positive advances as Victor Calanog, head of research at Reis Inc. reports. “Higher quality properties in the most desirable locations posted rent gains in excess of 5-10%, while class B/C properties, catering to lower income tenants, found it relatively more difficult to raise rents.”

While some investors have the capital to make an all cash purchase, others go the mortgage route in order to apply the additional funding to make other investments.

Justin Lopatin, VP at Baytree National Bank & Trust in Chicago says that low interest rates provides the incentive for investors to go for the mortgage.

"If you can take out an investment loan at 4.5% and rent out (the property) and make a few dollars a month, annually, the return will be worth the loan. Not to mention the tax write-offs and other advantages of owning real estate."

Since investors cannot obtain mortgage insurance for the property, they must produce 20% or more for a down payment. Also, investors must prove to the lender that they have enough income and assets to cover the mortgage in the event the tenant defaults on monthly rent. Lopatin says that typically the lender will count 75% of the rent toward the borrower's income-qualifying ratios, which would mean, for example a $1,000 monthly rent would count as $750 of the investor’s income.





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