The most popular of all mortgages for both purchasing and refinancing is the 30 year mortgage. Often, when borrowers are refinancing, they are only looking for a lower monthly mortgage payment which makes choosing a 30 year mortgage the most feasible option. The downside of this refinancing move is that after a borrower has already paid the mortgage for several years, this 30 year choice adds years back to the mortgage. Basically, the years of monthly paying are wiped out and the borrower is actually starting all over. With a 30 year mortgage term, the first few years of mortgage payments are mostly interest payments. On the other hand, refinancing to a 15 year mortgage term can usually lead to an increase in the monthly mortgage payment. Since mortgage rates are currently so low, the actual difference depends on how high the original mortgage rate was. With 0.7 to 1% origination fee, 30 year fixed mortgage rates are at 3.500% and 15 year fixed mortgage rates are at 2.875%. It is possible that the proposed 15 year monthly mortgage payment may be the same or only slightly higher than the current mortgage payment. For borrowers who can manage the monthly payment, a 15 year mortgage is completed in half the time and the interest savings is huge. Since the principal amount of the loan is paid down at a faster pace, less overall interest is actually paid on the loan. At today’s mortgage rates, there is an approximate $45,000 savings in interest payments per $100,000 with a 15 year mortgage when compared to 30 years.

Choosing between 30 years and 15 years when refinancing is a big decision, but one worth investigating. Borrowers should request Good Faith Estimates for both mortgage terms in order to accurately weigh the difference in the monthly mortgage payment. Although a 15 year mortgage can be a major long term savings, it is not for everyone. Putting any additional strain on a household budget may not be worth the risk and, therefore, has to be an individual decision.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders’ rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard .07 to 1% point origination fee.

During the mild spring months of 2010, economists had a rather positive outlook regarding the housing market and its road to recovery. Home-buyer tax credits caused an impressive increase in new home sales by 42 percent and an overall increase in home sales by 6 percent. Such a revival in the housing market typically translates into job creation and a positive domino effect on the entire economy. However, following the expiration of those tax incentives at the end of the first quarter, the sales of new and existing homes plunged by more than 25 percent, causing a screeching halt to employment opportunities and imaginings of market recovery.

The United States economy has historically relied on the housing market to fuel recovery in previous recessionary periods, as in postwar recoveries. When the housing market is expanding and flourishing it causes an increase in consumer spending, a boost in the manufacturing industry, and encourages job growth in a variety of sectors, such as construction, finance, and insurance. According the chief economist at Fannie Mae, Doug Duncan, real estate acquisition has historically accounted for one percent of gross domestic product (GDP), which measures the growth and health of a country’s economy. Today, the housing industry accounts for one-tenth of a percent of the nation’s GDP.

Economic forecasts are also bleak because of the recent surge in mortgage rates. Mortgage rates have increased by 0.125 percent over the previous week’s rates. For a 30-year fixed conforming mortgage loan the mortgage rate is 4.875 percent. For a 15-year conforming loan the mortgage rate is 4.250 percent. FHA loans are not far behind offering mortgage rates of 4.750 percent for a 30-year fixed mortgage and 4.000 percent for a 15-year fixed mortgage loan.

The primary cause of the recent and jarring increase in mortgage rates is the increase in bond yields. Mortgage rates mimic bond yields in that as the latter increases or decreases the former will do the same. Bond yields have increased in the last month because the Federal Reserve Bank, in an attempt to aide economic recovery by adopting an expansionary monetary policy, plans to purchase $600 billion in government bonds by June 2012. Although this move is meant to spur employment, which is grim with the unemployment rate at 9.8 percent, the Fed’s bond purchase has caused much controversy. Some policymakers believe it will not only increase the national deficit, but also further destabilize the economy.

As the contraction of the economy, due to the aforementioned causes, sends market recovery into a tailspin, lending institutions tighten the reins on underwriting requirements making it near impossible for borrowers to enter the housing market. Senior managing director at Amherst Securities Group, LP, Laurie Goodman, comments that foreclosures are expected to flood the market in coming months and “at a time when you need more borrowers, you actually have less.” Mortgage lenders are requiring higher down payments, near flawless credit histories, and more documentation verifying the borrower’s income, expenses, and assets. In addition to current pay stubs, two months’ worth of bank statements, and two years’ worth of tax returns, a lender could refuse funding because of something as trivial as a small tear in the corner of the paperwork.

Such cautionary lending practices verges on the edge of paranoia; and, for good reason, too. Most mortgage lenders are servicers that have to answer to investors, such as Fannie Mae and Freddie Mac. In recent news, Fannie and Freddie have veraciously pursued mortgage lenders to buyback faulty loans. According to Fannie and Freddie, mortgage lenders are responsible for originating bad loans using inaccurate data and dishonest lending practices. Mortgage lending giants, such as J.P. Morgan Chase, Bank of America, and Wells Fargo, stand to lose up to $106 billion either to repurchase the faulty loans as Fannie and Freddie demand, or to cover legal defense expenses, which they are likely to incur as lenders seek legal counsel and refute allegations.

During the housing boom of the previous five years, lax underwriting standards caused an eruption in mortgage liquidity. Lending institutions feel the pain today as mortgage defaults skyrocket and Fannie and Freddie push for mortgage buybacks. The issue at hand, however, is the current landscape of the economy as a whole. The imposition of stricter FHA underwriting guidelines will discourage even well-qualified borrowers from entering the housing market. Moreover, if the recovery of the housing market is indicative of an overall recovery of the nation’s economy, policymakers should avoid any actions that encourage the contrary.

For the most part, the decrease in mortgage loan applications is caused by an increase in mortgage rates. As of this writing, mortgage rates have increased by 0.125 percent over the previous week. The rate of 30-year fixed conforming mortgage loan is 4.875 percent and the mortgage rate for a 15-year conforming loan is 4.250 percent. FHA loans trail closely behind with mortgage rates of 4.750 percent for a 30-year fixed mortgage and 4.000 percent for a 15-year fixed mortgage loan. An increase in bond yields stimulated the increase in mortgage rates, which closely tracks bond yields. The Federal Reserve Bank announced that it plans to purchase $600 billion in government bonds by June 2012, which speculation has caused an increase in bond yields.

Stricter underwriting guidelines have also hindered mortgage loan originations. In order to recover funds lost in the wave of foreclosures, the Federal Housing Administration has intensified its qualification standards. It requires an annual insurance premium of 1.55, which is an entire percent higher than previously charged, to be paid out in monthly increments along with the other monthly costs. The FHA has also attached the upfront insurance premium to the loan-to-value ratio. Hence, if a mortgage borrower has a loan-to-value ratio of up to 95 percent, the upfront insurance premium would increase to 0.85 percent, which is 0.30 percent higher than average. If the loan-to-value ratio exceeds 95 percent, the upfront insurance premium would increase to 0.90 percent. Another harsher stipulation enforced upon borrowers is a higher down payment requirement. Traditionally, FHA borrowers qualified for 3.5 percent down on a home purchase. Today, however, in order to qualify for a 3.5 percent down payment, the borrower must have a credit score greater than 580. If his or her credit score is between 500 and 579, then a 10 percent down payment is the minimum required. If his or her credit score is less than 500, then he or she will not qualify for an FHA loan.

In addition to the difficulties experienced by borrowers, mortgage lenders are also feeling the heat. Fannie Mae and Freddie Mac, the government sponsored agencies accountable for the largest share of mortgage-backed-securities investments, is pressuring mortgage lenders to buyback faulty mortgage loans. The two GSEs blame mortgage lenders for originating bad loans under false pretenses and inaccurate data. Leading mortgage lenders, such as JP Morgan Chase, Bank of America, and Wells Fargo, risk costs as much as $106 billion in order to repurchase faulty mortgage loans or in legal defense expenses.

Despite the bleak outlook, surprisingly mortgage refinances account for over 75 percent of the overall share of mortgage loan applications, according to the Mortgage Bankers Association. Rising mortgage rates and tough underwriting standards may have slowed the momentum of mortgage refinances, but they have yet to halt interest completely. Fortunately, the facts remains that mortgage rates are at their lowest levels and refinancing a mortgage loan still offers many benefits to homeowners.

Almost everyone is aware and knowledgeable about the FHA 203b loan. This the most common FHA mortgage product available that has gained popularity over the past three years. It is available for new and existing one to four family homes, condos and townhouses. Borrowers with a satisfactory credit record, verifiable employment and income find this an easy and affordable loan to obtain. For those with a credit score of 580 and above also continue to enjoy the low required down payment of 3.5%.

With the current real estate market taking a downward turn, the condition of available homes for sale has also declined. Foreclosures and short sales are flooding the market making it difficult for buyers to find homes that are in decent condition. As these homes are often neglected and abused, many buyers will turn away without knowing the real potential of a home beyond what they see. Here is where the FHA 203k loan product comes to the rescue. It is for the fixer upper and homes that have not been maintained.

The FHA 203k is available for owner occupants only and for single to four family existing homes that have been completed for at least one year. For homes that are in need of repair, maintenance or rehabilitation, this is a great product offered through FHA. It can be used for repairs such as painting, room additions, decks, patios, bathroom and kitchen remodeling, appliances, finishing an attic or basement, new exterior siding, heating or air conditioning, plumbing, roofing and flooring. HUD does have some regulations such as energy efficiency and structural requirements such as caulking, insulation, ventilation and smoke detectors.

These FHA 203k loans are processed as normal except that the money for repairs can also be rolled into the loan. An as-is appraisal is completed with the appraisers estimate of the value of the home after repairs and improvements are done. The borrower is required to submit a proposal of the necessary work which includes a detailed cost estimate. The amount that can be borrowed is the as-is purchase price plus the rehab costs or 110% of the expected value of the property after repairs have been completed. In other words, an as-is price of a home at $150,000 will also allow $15,000 borrowed for rehab. The rehab money is kept in an escrow account and is released as the work is done. FHA requires that all rehab be completed within 6 months. As only certain lenders will offer an FHA 203k loan, they may also have their own requirements. The interest rate is also higher than a normal FHA mortgage and the amount of time to process this type loan is usually longer.

As real estate continues to be saturated with a variety of homes and an abundance of foreclosures and short sales, many consumers are looking to find a low cost, good deal purchase. At the same time, FHA continues to be a leader in the mortgage market. Knowing which is the right FHA loan product to pick, buyers can choose from a larger selection of homes.

The Federal Housing Administration, an arm of HUD that insures mortgage loans, charges two insurance premiums on Home Equity Conversion Mortgages. The first is an upfront percentage of the amount borrowed and the second is annual percentage of the amount borrowed. On the standard HECM, the upfront insurance premium is 2 percent of the appraised value of the home, to a maximum value of $625,500, regardless of how much is actually borrowed. On the new HECM Saver Option, the upfront insurance premium is 0.01 percent. Both reverse mortgage options require an annual insurance premium of 1.25 percent of the actual loan balance on the home.

A reverse mortgage is very different from a traditional home loan. First, this unique type of loan pays the borrower. Senior homeowners who qualify for the HECM have several options with regards to disbursement of payments. They may receive the desired amount borrowed as a lump sum. They may receive it as an equity line of credit on the property. Alternatively, borrowers may receive regular monthly payments of the amount borrowed.

Second, the amount borrowed on a reverse mortgage is not limited by the income of the borrower. Rather, the amount borrowed is dependent upon the age of the borrower, the current interest rate, and either the appraised value of the property, sales price, or FHA’s mortgage limits, whichever is less. In short: the older the borrower, the more valuable the property, and the lower the interest rate, the higher the amount that may be borrowed against the home. Other qualifying requirements include: (1) at least 62 years old, (2) either own the property outright, or have a mortgage balance that may be paid off at closing by proceeds from the reverse mortgage, and (3) FHA requires prospective HECM borrowers to attend a counseling session with a HUD-approved HECM counselor regarding the financial obligations and legal aspects of a reverse mortgage.

The final difference between reverse mortgages and traditional home loans is repayment of the loan. The accrued interest is added to the principal amount of the home; however, it is not necessary to repay the loan in regular installments. Rather, when a homeowner sells his or her home, passes away, or moves out of the residence for more than 12 months, then the reverse mortgage plus any interest accrued and other fees are due in full to the lender.

Since the mortgage market crisis in 2007, affordability of a standard HECM was a primary concern. According to the FHA Commissioner, David Stevens, “…some senior citizens find that our [reverse mortgage] fees are too high.” Stevens is excited about the new HECM Saver Option because it will significantly lower the upfront costs to seniors to essentially nothing. With the HECM Saver Option, homeowners are able to borrow 10 to 20 percent less than the standard HECM, but pay 99.5 percent less.

These higher loan limits were instituted in 2008 when President Bush signed the Housing and Recovery Act. Prior to that time, the conforming loan limit was $417,000 in high cost areas. Since the signing of the Recovery Act, the conforming loan limit has been $729,750 in most high cost areas or 150 percent of the median home values within a metropolitan area. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the high loan limit is $938,250. In 2008, at the height of the housing crisis, these higher loan limits made refinancing and home buying available to consumers who, otherwise, would have had no where to turn. Backed by the government, the jumbo conforming loan has become quite a popular product over the past two years while it has saved the jumbo mortgage market.

This high conforming loan limit is especially helpful in areas such as California and New York where normal housing tends to be much costlier than the rest of the country. With housing prices down, many borrowers in high cost areas have found that they are eligible for refinancing with a conforming jumbo loan. Even first time home buyers can take advantage of an FHA Conforming Jumbo Loan for their purchase. These loans carry lower interest rates than true jumbo loans with the Jumbo 30 year fixed rate at 4.875% (0.7 to 1 point), the Jumbo 15 year fixed at 4.375% (0.7 to 1 point) and the Jumbo 5/1 ARM at 4.00% (.07 to 1 point).

As the housing market continues to be fragile, the extension of this H.R. 3081 is great news. Without it, consumers would have found the jumbo loan market in critical condition. In reality, with fewer investors for jumbo loans, the jumbo loan market could have come to halt on December 31, 2010 had this bill not been extended. The possible implications could have trickled through the entire housing market creating another crisis. At the current time, approximately 90% loans are going through Fannie Mae, Freddie Mac and FHA. With this latest extension, it is obvious that their book of business will keep growing for another year as the housing market continues to heal. . With conforming loan limits extended until September 30, 2011, consumers can look forward to another year of low interest rates while the government continues to treat the housing market with tender care.

H.R. 6218 is called The Housing Opportunity and Mortgage Equity Act of 2010 (HOME). It is designed to offer refinances directly to homeowners who need help. As other foreclosure prevention programs have failed to prevent further defaults, this bill can possibly reduce foreclosures drastically and reward those who have continued to make their monthly mortgage payments even through economic struggles. With reduced mortgage payments, consumers will have more available cash to spend each month thus stimulating a dragging economy. In addition, this type of refinance can help eliminate strategic defaults and loan modifications.

Following are some of the details of the bill:

-A qualified mortgage is one that is current or in default as long as it is the borrower’s primary residence and is owned or guaranteed by Fannie Mae or Freddie Mac, This residence can be a single family dwelling, one to four family dwelling, condominium or a share in a cooperative ownership housing association.

-Any penalties for prepayment or refinancing and penalties due to default or delinquency would be waived or forgiven.

-The term of the new refinance could be no longer than 40 years.

-The servicer cannot charge the borrower any fees for refinancing.

-Fees for title insurance coverage will be reasonable in comparison with fees for the same coverage available. Any fees associated with the refinance would be rolled into the mortgage.

-The enterprise (Fannie Mae and Freddie Mac) will pay the servicer a fee not to exceed $1,000 for each qualified mortgage that is refinanced.

-There will be no appraisal required.

-In order to pay for this, the old mortgages will be paid off when refinanced. The new refinances will be funded by selling new mortgage securities.

Although lenders believe that they will lose too much money if this bill is adopted, it can probably be the best solution given to date to halt the endless foreclosure issue. It will be interesting to see how this bill develops, what will be added and what will be taken away or even if it will pass. According to Congressman Cardoza’s website, there are about 30 million mortgages guaranteed by Fannie Mae and Freddie Mac. The savings from this program could be tremendous and have been estimated by Morgan Stanley and JP Morgan Chase to be an annual reduction of approximately $50 billion in mortgage payments. While the success of the available current programs is still questionable, this proposed bill which allows almost everyone to refinance could be the answer to accelerating the economy.

As reported by Zillow, according to Fair Isaac Corporation, the creator of the FICO score, 29.3% of today’s borrowers have a credit score below 620 which makes them unable to borrower money for a purchase mortgage. Anyone with a credit score below 620 is very unlikely to be able to obtain financing. Even if this group of people had a large down payment, they would most likely not be able to obtain a mortgage. On the other hand, the good news is that 47% of today’s borrowers have scores above 720 and a total of 71% are able to borrow. Higher credit scores are awarded with the best interest rates available.

Due to tight credit standards and stricter underwriting guidelines, many borrowers today are being turned away from obtaining a mortgage. Years ago, these same borrowers were turning to sub-prime mortgage products as their only financing option. At that time, many of these same borrowers would have qualified for FHA loans but opted for sub-prime instead. In fact, prior to the introduction of sub-prime, there were only FHA loans available to these borrowers. Now, with FHAs exposure in the mortgage market so pronounced, they, too, are further tightening their lending guidelines making it difficult for this 29.3% group of people to obtain a mortgage.

More people have been choosing to clean up their credit and pay off credit cards as credit card interest rates have increased. This is a positive move in an effort to increase their credit scores and make them more eligible to buy a home. Although people have been cutting back other spending while doing this and growth of the economy has suffered, they are becoming responsible spenders. As this movement continues, the percentage of borrowers that are credit worthy and able to buy should increase over time. Just as it took many years for this turmoil to occur, it will take time for the benefits of these actions to be seen.

Although the number of borrowers that are unable to obtain a mortgage may seem high, earlier studies show that nearly 20% of the population had FICO scores below 620 in 2002 when the unemployment rate averaged around 5.7%. Considering the fact that we have just gone through the Great Recession followed by a very slow economic recovery and a very high unemployment rate, this new percentage of 29.3% is not so frightening. Reflecting on the fact that 71% of borrowers do qualify for a new home loan, things may just improve when borrowers realize that they are in this category and able to take advantage of historically low interest rates.

***CORRECTED 9/29 AT 11:35 AM- ZILLOW FOUND 71% OF BORROWERS QUALIFY FOR A PURCHASE LOAN, NOT A REFINANCE

The National Association of Realtors announced this morning a 7.6 percent boost in home sales for the month of August over home sales in July. NAR reported a seasonally adjusted annual rate of 4.13 million home sales for August; July home sales, which are the most disappointing of the year, were 3.84 million. According to NAR data, 34 percent of the home sales reported for August were distressed homes, whereas distressed homes accounted for 32 percent of the home sales for the month of July. Chief economist for NAR, Lawrence Yun, says that although the expiration of the home buyer tax credit in April slighted the recovery of the housing market, the market “… is trying to recover on its own power.” He adds that sales could improve further, “…provided the economy consistently adds jobs.”

Ultra-low mortgage interest rates are definitely strong incentives for homeowners to refinance their mortgage loans. Conforming fixed mortgage rates, as of this writing, are 4.00 percent for well-qualified borrowers, which are lower than Tuesday’s reported rates of 4.125 percent, with 0.7 to 1.0 point origination. Current 15-year rates are 3.5 percent, which are also slightly less than Tuesday’s rates of 3.625 percent. Such low rates have motivated some homeowners to refinance their loans. As the Mortgage Banks Association reported that refinance applications increased by 17 percent.

In addition to positive home sales and low mortgage rates, the Obama Administration has implemented two programs to help homeowners refinance their mortgages: HARP and the FHA-Short Refinance program. The Home Affordable Refinance Program (HARP,) which was launched last year, helps homeowners who are underwater on their mortgage to refinance into better loan terms. The program does not reduce the principal amount owed on the loan, but, it does allow homeowners to take advantage of favorable mortgage rates. The FHA-Short Refinance program, which was put into gear earlier this month, aids non-FHA borrowers with negative equity by reducing their mortgage loan balances. Such borrowers must be current on their payments in order to qualify for this program and lenders must agree to write off at least 10 percent of the unpaid principal.

Despite historic low mortgage rates and creative government programs, stronger economic factors are involved: strict qualification standards, expensive closing costs, which can range from 3,000 dollars to 5,000 dollars, increasing job loss, and decreasing property values. The FHA-Short Refinance program is a good example of the enforcement of such stringent qualification requirements. Not only does the program require lenders to write down a minimum of 10 percent of the debt owed, which seems highly unlikely, but also the program requires potential borrowers to meet standard FHA underwriting requirements, such as occupying the property as a primary residence, maintaining a credit score equal to or better than 500, and sustaining steady employment for at least two years, preferably with the same employer. Moreover, the Federal Housing Administration also requires any bankruptcies to be at least two years old, provided the home borrower has had perfect credit since the bankruptcy discharge, and any foreclosures to be at least three years old with pristine credit since.

These restrictions are only amplified by the backdrop of increasing unemployment and bankruptcy filings. The Department of Labor predicts the unemployment rate to reach 10.1 percent by October, which is the worst employment slump since post-WW II. Without steady income, homeowners cannot qualify for a mortgage loan refinance, let alone afford a mortgage payment, regardless of how reduced the new payment is. Plus, the National Bankruptcy Research Center reported 127,028 bankruptcy filings for the month of August. The number of personal bankruptcy filings for this year is more than 1 million, which is nearly 8 percent higher than last year. Tough underwriting guidelines not only discourage homeowners from refinancing their mortgage loans, but also make refinancing nearly impossible to accomplish.

Borrowers must be current on their existing mortgage in order to even consider applying for the FHA short refi program. As the subject property must be occupied by the borrower as their primary residence, this program is not available for second homes or investment properties. The existing mortgage that is being refinanced cannot be an FHA insured mortgage although the borrower now must qualify for the FHA short refinance using the standard FHA underwriting guidelines including a minimum credit score of 500 or above.

The FHA short refinance program is really a reduction in principal program. The current first lien holder must be willing to write off at least 10 percent of the unpaid principal balance of the mortgage so that the refinanced FHA insured mortgage has a loan to value ratio of no more than 97.5 percent. In addition, any second lien holders must agree to re-subordinate. The new loan, which includes the first and any second liens, may not have a combined loan to value ratio above 115%.

When qualifying for the FHA short refinance program, for any borrowers who receive a refer decision or any applications that require manual underwriting, the total monthly mortgage payment, including second mortgages, cannot be greater than 32 percent of the gross monthly income and the total debt cannot be greater than 50 percent of the gross monthly income.

In order to help the success of this program, the Treasury will provide incentives to second lien holders who participate and agree to full or partial reduction of liens attached to FHA case numbers assigned on or after September 7th, the first day of the FHA short refinance program. This new program will continue to be available until the end of 2012.

So is the government’s short FHA refi program for you? If you are a home owner who is currently underwater but current on your mortgage payments, it may be a good idea to call the number on your mortgage bill to find out. Borrowers must be prepared for applications to take more than the normal amount of time for processing, underwriting and closing as there are many players in this transaction and all must agree to the final outcome. In the end, if all lenders, investors and lien holders get involved, the government’s new FHA refi program may reduce the amount of future foreclosures and strategic defaults that would only end up hurting the housing market even more.