President Bush has unveiled a plan to help out homeowners who are facing higher mortgage rates in the next few years.
Before I go into this further, let me explain some basics. A typical homeowner who requires financing would get a 30 year fixed mortgage. Besides a 30 year fixed rate, there are other financing options available such as a 15 year fixed rate, adjustable rates and other programs. Usually, if a homeowner intends to stay in a home longer than 7 years, a lender would typically suggest a 30 year fixed rate. A borrower may go with a 15 year fixed rate if they wish to live in the same home longer and pay off their mortgage at a shorter term. Typically, a 15 year fixed rate is lower than a 30 year but the payments are drastically larger depending on the amount of the loan. A 15 or 30 year fixed is attractive to many because the rate does not change during the term of the loan.
Then there are these ARM (adjustable rate mortgage) programs which means that the first 3, 5, 7 years of the loan, the rate is adjustable and alot lower than the going fixed rate; but after the 3rd, 5th or 7th year, the rate re-adjusts (the new rate depends on many factors) and is generally higher than the rate 3, 5 or 7 years earlier when the loan began. An adjustable mortgage is feasible for someone who plans to live in the house in less than 3 years. We all know that during first few years of our mortgage, most of the monthly payment goes to the interest and very little towards the principal. An adjustable rate mortgage is also considered by many who cannot qualify for the fixed rate which is higher or who cannot make the higher monthly payment. Another resource for explanation would be this site I found.
So going back to President Bush's plan. The plan only helps borrowers with an adjustable rate mortgages. After the first 3, 5, or 7 years depending on the borrowers program, the rate converts to a much higher rate. The President would like the lower interest rate frozen for five years longer before it converts to the higher rate. To many borrowers who have received a loan between Jan. 1, 2005 and July 31, 2007, this is good news. The borrower would not have to pay the larger monthly payment for a long time. But in order for that borrower to be qualified, the borrower must live in this home full time, in other words, the home cannot be an investment property where it is currently rented out; and the borrower cannot be in default in any of their past mortgage payments.
As it is, not too many borrowers fall under this category, hence, the President needs to come up with a better plan. The President hopes that this will prevent homeowners from bailing out of their higher mortgage payment or preventing people from putting their homes on the market before their mortgage re-adjusts to the higher rate. Hence, adding to the housing slump.
The President's plan is being criticized by many. Some suggestions were to increase the freeze to 7 years. But the bottom line is, investors in mortgages and mortgage-backed securities are the ones who will lose the money. Maybe I need to re-look at my portfolio to make sure none of my mutual funds cover the mortgage sector. The real bottom line is, people, save money, pay your mortgage, don't buy a house if you can't afford the projected mortgage payment! Don't let the government keep bailing you out. Enough said, I'll work on finding a more enlightening topic.
