Red Carpet For Homebuyers

In the current market, it's almost impossible to separate the terms "interest rate" and "refinance." Rates continue to fall and all anyone can talk about is refinancing their current mortgage.

However, today's amazingly low rates are also prompting lenders to roll out the red carpet for home buyers. Why?

The Early Show financial advisor Ray Martin explains, "Mortgage lenders are increasingly concerned about their fate when interest rates begin to rise and the profits from refinancing dry up as that activity slows."

Lenders know these rates won't last, and they want to build future business by attracting the network of realtors, builders and brokers that all play a part in the home-buying transaction.

What kinds of incentives are lenders offering?

• Lower Closing Costs: Some lenders are cutting costs by as much as $500.
• Lower Interest Rates: Some lenders such as Chase Home Finance are offering mortgages at an eighth to a quarter of a percentage point lower for customers buying as opposed to refinancing.
• Close Deal Faster: Banks are overwhelmed by refinancing right now; it's taking up to 90 days to complete the transaction. However, homebuyers are being allowed to cut to the front of the line; they are closing deals in 30 to 60 days.
• New Features/Products: A prime example of this is E-Trade's announcement Monday that it was rolling out a "portable mortgage."

Portable Mortgages

Only available to homeowners, this is a mortgage that travels with you from home to home. Borrow between $60,000 and $1 million, lock in today's low rates, and then when you move you don't need to go through the hassle of applying for a new mortgage - you simply keep the one you have and apply it to your new home.

Yes, there are drawbacks. Your interest rate will be about three-eighths of a percentage point higher than a standard mortgage. If you don't plan to move around a lot, there's no need to pay more for a mortgage. Also, you don't have a variety of portable mortgages to choose from - only ETrade offers this product.

If the product is a success, Martin says, other companies may develop similar mortgages. Even if more portable mortgages aren't in the works, Martin expects lenders to continue to make it easier to buy a home by offering other features. For example, features that allow smaller down payments or wind up making it easier to sell a home.

There may be some new incentives to buy, but does that make it a good time to buy a home?

Martin says, yes and no. No question, rates are low right now which makes it a great time to get a mortgage. On the other hand, home values have been steadily growing in recent years. This presents a couple of problems.

First, homes in some areas are bound to be overvalued. Second, according to Martin, it could wind up being harder to sell the home as the market softens. Here's why: low interest rates allow people to buy more expensive homes. As rates head back up, fewer people will qualify for these large mortgages. Thus fewer people will be able to afford the expensive home you bought and now want to sell. Not only will there be fewer perspective buyers for your home, you may not be able to sell it for as much as you wish.

Assumable Mortgages

There's one product out there that may protect you from this fate - it's called an assumable mortgage. If you have one, it may be easier to sell your home down the road.

Martin explains, "Assumable mortgages allow the buyer to assume, or take over, your mortgage at the same interest rate.

"If you are selling your home and can advertise that a buyer could assume your low-rate mortgage, that could help sell your home faster or increase your asking price," he says.

In other words, instead of the seller paying off his mortgage with the proceeds of his sale, the buyer simply takes over the mortgage on the house.

The only problem is that these are now harder to come by. In the early 1980s almost half of all mortgages were assumable. But lenders now realize that when interest rates rise, if half of their mortgages are stuck at much lower rates, they lose money.

Some regional banks still offer assumable mortgages. And, if the real estate market slows down as predicted, more banks may begin to offer assumable mortgages to draw more business. If nothing else, it's worth asking your lender about this option.

Adjustable Vs. Fixed

No matter the market, house hunters always ask Martin the standard question, "Should I get an adjustable or fixed-rate mortgage?" While the answer varies based on each person's situation, Martin typically leans toward the fixed-rate option. Yet for the first time in quite awhile, it may make sense for more people to go for the adjustable rate. He says, "I was surprised by the big spread between fixed and adjustable mortgage rates."

For example, in past years lenders may have offered a fixed-rate mortgage at 7 percent and a five-year adjustable mortgage at 6.5. While you would save some money in interest during the first five years, you would not save enough to risk your rate rising above 7 percent.

But recently, Martin found a fixed-rate at 5.25 percent and an adjustable at 4 percent. Comparing these two rates on a loan of $250,000, you wind up saving $11,220 over five years by choosing the adjustable rate. If there's a good chance you will be moving within five years, you might consider the adjustable rate.