Getting a Mortgage in 2009

With the economy in trouble and the declining housing market all over the news, it might surprise you that now is an excellent time to get a mortgage. However, if your credit is bad, you will likely not qualify. Borrowers with decent credit can get an excellent deal on a fixed-rate, 30-year conforming mortgage. To qualify, you’ll need a good FICO score, a reasonable debt burden, and proof of continuing income.

Mortgage rates will likely dip even lower in 2009, bringing up the question of whether it’s better to borrow now or wait for an even better rate. Mortgage experts tend to disagree on this issue. In simple terms: if you like to gamble, then wait. If you lose sleep at night fretting that rates will soon rise, then borrow now.

Here are some things to consider about the current mortgage market:

Comparison Shop, Especially Now

In a typical economy, one loan is pretty much the same as any other, since most interest rates on 30-year fixed loans are grouped within about a quarter of a percentage point. This is not so today. With the uncertain economy, lenders vary greatly in terms of how much risk they’re willing to assume in loaning money. This is why it’s important to shop around. You’ll want to keep checking often, since home loan rates are continually in flux.

Lock in a Fixed Rate for New Loans

Disregard what you might have heard in less troubled times about the pros and cons of fixed versus adjustable rate mortgages. Nowadays, you’ll always get the best deal on a fixed rate loan, because this is the financial market that congress has designated for support. The time of securitized adjustable-rate mortgages has come to an end, so most banks don’t want to originate ARMs. Lenders no longer offer attractive rates on these risky loans.

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Keep Your ARM, for Now

If you already have an ARM that is due for an interest rate adjustment soon, there’s no need to rush to get rid of it. Short term interest rates have taken such a dive that you’re likely to actually see a reduction in your monthly payment. The one-year Treasury bill yield has dropped to less than half a percent; so even if your ARM is indexed to the one-year Treasury bill, chances are you’d still only pay about 3.25% per year. ARMs that are indexed to LIBOR are adjusting to the low 4% range, which is also an excellent rate.

Monitor Your Finances

Getting one of those attractive low interest rate fixed loans is difficult, because Fannie Mae and Freddie Mac have made standards even stricter for loans they’re willing to buy or guarantee, even though both of these megalithic mortgage finance companies are now under government control

Your FICO score should be at least 720 to garner the best possible interest rate, though for a large enough fee, both Fannie and Freddie will guarantee loans all the way down to FICO scores in the mid 600s. You may also need a 20% down payment.

One of the biggest hurdles for many buyers has been the tightening of lenders’ debt-to-income standards. Monthly mortgage payments can’t be more than 28% of gross income for Fannie or Freddie conforming loans, and all monthly debt payments combined (e.g., student loans, auto loans, revolving credit accounts, etc.) can’t exceed 36% of a borrower’s gross income.

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For a loan guaranteed by the Federal Housing Administration (FHA), these figures are 29% for mortgage debt, and 41% for combined monthly debt.

Carefully Consider Whether to Refinance Now

Deciding when to refinance boils to down to how willing you are to accept a certain amount of risk. Utilizing one of the many available online calculators can help you make a good analysis. A good rule of thumb is that refinancing is a good option if the new interest rate is a full percentage point below what you are currently paying, and if you don’t plan on moving soon.

The argument for waiting to refinance is that the Federal Reserve and Treasury Department are set on pushing mortgage rates even lower in 2009, and are likely to get their way. This means putting pressure on banks to keep lowering interest rates; not just on mortgage loans, but on all kinds of personal loans as well.

On the other hand, while it seems like a reasonable predication that rates will drop even lower, nothing is guaranteed. Rates have crashed so quickly that trying to wait for rock bottom may be a mistake. If the numbers work for you, you really can’t go wrong in deciding to refinance now.