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Loan Rate Refinance - Taking Advantage Of Loan Rate Refinance

mortgage mortgages market borrowers

The mortgage industry in the United States is currently in a state of shambles. The collapse of the subprime mortgage market has lead to a huge contraction and correction in the real estate and stock markets. The housing bubble resulted in home prices rising so far and so fast that many potential homeowners were simply priced out of the market, which means that they could afford to buy homes since the prices were so high. Thus, mortgage lenders started getting out old loan models and making them available to borrowers.

While the real estate market did not approach the same speculative fever as it did in Japan, the market did reach enough fever that forty-year mortgages started to become available. Other exotic mortgage loans included adjustable-rate mortgages as well as bridge loans, interest-only loans and “negative amortization” loans cluttered up the market considerably. Importantly, the housing bubble created an opportunity for predatory lending practices to become popular, which they did.

Predatory lending practices took root in the subprime mortgage lending industry, which specialized in making mortgage loans to borrowers with credit ratings “sub-prime” or below the prime credit rating. The problem with exotic mortgages is that they are dependent on home prices continually rising. Once the housing bubble started to burst and home prices started to fall for the first time in several years, these mortgages suddenly become exploding bombs that took down hundreds of subprime lenders and created a crisis in the housing market.

Unfortunately, the crisis is not yet over. Many experts estimate that home prices need to fall another thirty to fifty percent before they accurately reflect market levels. This means that the United States is likely to see another cataclysmic correction and crash, followed by a long-term deflationary period much like the Great Depression.

Before that happens, there is some good news: mortgage interest rates are at their lowest levels in years. This reflects the unique conditions in the secondary mortgage market, and gives borrowers an opportunity to take advantage of refinancing loan rate. Contrary to popular belief, interest rates are not arbitrarily set by lenders. The entire reason why the financial crisis was so bad is due to events that took place in the secondary mortgage market.

This market is populated by investors who buy securitized mortgages from such entities as Fannie Mae and Freddie Mac. As investors buy or sell these mortgages, the national mortgage interest rate goes up or down based on investor demand for mortgages. Thus, buying raises the interest rate and selling lowers it. Since the Federal Reserve has been purchasing mortgage-backed securities from Fannie Mae and Freddie Mac to the tune of billions of dollars at a time, mortgage rates are at historical lows.

Naturally, lenders have been encouraging homeowners to take advantage of low interest rates by refinancing their mortgages. When refinancing, the old mortgage is simply canceled and subsumed into the newer mortgage. Borrowers who use loan rate refinance mortgages in order to lower their monthly payments need to be aware that there are significant consequences, not all of them positive.

For example, many borrowers are not aware that the amortization period is reset upon refinancing. In the early years of the mortgage, the majority of each monthly payment goes to pay the interest on the loan instead of the principal. It is not until later that the principal starts to be paid down in earnest. If the borrower refinances after this early part of the repayment process, they will have to effectively repay all of that interest over again, even if the interest rate itself is lower.

Obviously, this does not represent a favorable situation for the borrower. Loan rate refinance mortgages seem attractive, but only if the borrower has not had their current mortgage longer than a few years. The sooner they refinance, the better off their are in terms of interest payments. Loan rate refinance mortgages can help borrowers achieve lower monthly interest rate payments.

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