2014 Prime Rate Forecast: Prime Very Likely To Contiue At 3.25% All Year

Here's a clip from today's Federal Open Market Committee (FOMC) monetary policy release:

"...Beginning in January [2014], the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month..."

So the Fed has decided to lift its foot off the money-printing pedal next month, just a little bit, and will buy $75 billion of debt per month, instead of $85 billion.

Wall Street reacted positively to the Fed's decision to begin tapering its bond-buying program, with both the Dow Jones Industrial Average (DJIA) and the S and P 500 Index closing with new record highs today.

Scaling back on bond buying, after all, means that the Fed is confident that the economy will continue to improve.

Wall Street was also cheered by the Fed's solid language regarding short-term rates; another clip:

"...The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal..."

In other words, the Fed is going to keep short-term rates (which includes the US Prime Rate)  in the deep freeze until the economy is very firmly in escape-velocity mode, and is willing to risk some inflation down the road to get there.

The United States Prime Rate is essentially a function of the fed funds target rate:

US Prime Rate = (The Federal Funds Target Rate + 3)

And , at 3-1/4%, the Prime is currently as low as it can go.

Month after month after month of strong, non-farm payrolls, with 2% inflation on the side.  That's what the Fed is looking for.

Earlier today, the FOMC also released projections for the benchmark fed funds target rate.  Out of 17 participants, only 2 are forecasting a increase for the fed funds target rate at some point during 2014, with 15 predicting that the FOMC will leave it where it is right now (range of 0%-0.25%.)

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Dr. Janet L. Yellen

Dr. Janet L. Yellen is set to take over as Fed Boss early next year.

Her challenges are many, and the scrutiny will be intense.  Continuing to steer and eventually complete the economic recovery which Ben Bernanke started will be no picnic, with the headwind of a dysfunctional Congress and a virtually empty toolbox.

But if anyone has the brains and background to get the job done, it's Dr. Yellen.

Ben Bernanke is a clever economist too.

But, despite being an expert on the Great Depression, Dr. Bernanke hasn't been able to get the US economy back to full strength, and he's had four years to try. 

Moreover, Fed Boss Bernanke was late in his reaction to the banking crisis and subsequent housing crash, a tardiness that may have contributed to the protracted nature of the worse recession since the big one back in 1929.

Let's see if Dr. Yellen can figure out how to get banks to stop sitting on their massive piles of cash, and lend to deserving businesses and entrepreneurs.

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Mortgage Rate Forecast

If the economic recovery continues at a strong and sustained pace, investors will continue to rotate out of the safety of government debt, and move to riskier assets like stocks.

If that happens, US Treasury yields will rise, which will cause mortgage rates to rise (rates associated with  30-year, fixed-rate mortgages track very closely with the yield on the Ten-Year U.S. Treasury Note.)

If the recovery peters out, then investors will scramble back to government bonds, and mortgage rates will fall.

Anyone who thinks that they can offer a more accurate prediction of American mortgage rates, will probably try to sell you a popular and vintage bridge in Brooklyn next....

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From the rate watchers here @ www.FedPrimeRate.com: All the best for 2014.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 29^TH, March 19^TH and April 30^TH, 2014 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 29^TH, March 19^TH and April 30^TH, 2014 FOMC monetary policy meetings are adjourned: 100% (certain)
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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2013 Prime Rate Forecast: Prime Extremely Likely To Remain At 3.25% All Year

Here's a clip from the last (October 24, 2012) FOMC monetary policy statement:

"...In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015..."

Today's statement was interesting because the Fed switched to explicit  employment and inflation targeting.  Clips from today's statement:

"... In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored..."

Therefore, it's an extremely good bet that the Fed won't lift short-term rates, including the US Prime Rate, during 2013, and will probably leave its cardinal interest rate exactly where it is during 2014 as well.

The Fed is currently projecting that the jobless rate will be in the range of 6.9% to 7.8% during 2013.  The projected central tendency for 2013, which leaves out the top and bottom three projections, is currently 7.4% to 7.7%.  Federal Reserve Board members and Fed Bank presidents are the contributors to these  projections.

The US Prime Rate is essentially a function of the fed funds target rate:

U.S. Prime Rate = (The Federal Funds Target Rate + 3)

At 3.25%, US Prime is currently as low as it can go.

Employment / inflation targeting is new territory for the Fed, and it explains why the central bank is willing to dump huge sums of newly printed cash into the system, risking serious inflation down the road.  The money supply continues to expand, and will only keep growing as the Fed continues to blow up its balance sheet.

The nation needs jobs in big way.  The Fed is, therefore, risking fresh, inflation-menacing cash exactly where it should be risking it: housing.  Mortgages are, after all, precisely where the Great Recession started in the first place.

Mortgage Rate Forecast

Here's another key clip from today's statement:

"...To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month..." 

Both actions described above will place continued and substantial downward pressure on mortgage rates.  The average rate on a 30-year, fixed-rate mortgage during November 2012 was 3.35%.  With the Fed doing all it can to help the housing market, don't be surprised if mortgage rates fall below Prime (3.25%) in the short term.

The Fed controls the Prime Rate much more directly than it does mortgage rates. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year U.S. Treasury Note.

In the long term, as the economy improves, capital will flow from the safety of long-term, government debt into riskier assets like equities.  As this happens, long term bond yields will rise, which in turn will cause mortgage rates to rise. 

From the entire crew here @ www.FedPrimeRate.com: All the best for 2013.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 30^TH, March 20^TH and May 1^ST, 2013 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 30^TH, March 20^TH and May 1^ST, 2013 FOMC monetary policy meetings are adjourned: 100% (certain)
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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2012 Prime Rate Forecast: Prime Very Likely To Remain At 3.25% All Year

Since August 9, 2011, the Federal Open Market Committee (FOMC) has included the following language in each post-monetary-policy-meeting press release:

"...The Committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013..."

This means that the U.S. Prime Rate, which is the fed funds target rate plus 3 points, is very unlikely to rise during all of 2012. And, of course, Prime can't go any lower since, at 3.25%, it's already at rock bottom.

America's central bank is unique in that it has a dual mandate: keep prices stable and keep the unemployment rate as low as possible (maximum employment.) If the Fed were like many other central banks that only have to worry about keeping prices stable, then there is no way it could send such a powerful, long term signal to markets (near-zero rates for 2 years.) However, Congress decided to complicate the Fed's mission by making it a pseudo-political organization, and that's the way it is. When 200,000+ jobs are being created month after month, then the Fed will start thinking about raising short-term interest rates. Until then, it's cheap money for American banks, businesses, credit-card borrowers, etc.

So, you savers out there who are tired of extremely weak returns on your saving accounts and CD's: don't blame Ben Bernanke. He's just doing what he's supposed to do, according to the Fed's mandate.

Mortgage Rates

The Fed doesn't control mortgage rates like it does the Prime Rate. Rates on 30-year, fixed-rate mortgages track very closely with the yield on the 10 Year US Treasury Note.

But since:

• economic growth is probably going to remain tepid for many more months, and
• inflation expectations are tame, and
• Wall Street money continues to be very keen on finding shelter under the copper roof that is US government debt

mortgage rates are likely to remain extremely favorable for solid borrowers during 2012.

The Ten-Year Treasury yield was 3.31% at the end of 2010. It ended 2011 @ 1.87%.

Mortgage behemoth Freddie Mac recently reported that the average rate on a 30-year, fixed-rate mortgage ended 2011 @ a very homebuyer friendly 3.95%.

From the entire gang here @ www.FedPrimeRate.com: All the best for 2012.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 25^TH, March 13^TH and April 25^TH, 2012 FOMC monetary policy meetings.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the January 25^TH, March 13^TH and April 25^TH FOMC monetary policy meetings are adjourned: 100% (certain)
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Second Lien Plan Will Help Homeowners Struggling with Second Mortgages

Second Mortgages

The Obama administration has a new plan to help homeowners who are struggling to keep up with their second mortgages. It's called the Second Lien Program, and it will be active in about a month. Here's a clip from the Treasury Department website:

"...The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate..."

And here's some more insight from a Bloomberg article:

"...Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, according to figures from the Mortgage Bankers Association in Washington. Loans in foreclosure rose to 3.3 percent, up from 2.04 percent a year earlier.

Obama’s overall plan to reduce foreclosures by modifying mortgages targets as many as 4 million homeowners. As many as half of the participants in the mortgage-modification program may be eligible for the second-lien assistance, administration officials said.

Congressional Action

The administration also intends to urge action by Congress to make Hope for Homeowners easier to use and more accessible, the administration officials said. The program is primarily aimed at borrowers who are “underwater,” owing more on their mortgages than their homes are worth.

No other legislative changes are required for the administration’s revised housing plans to take effect, the officials said.

The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program in order to bolster their home- equity portfolios, Laurie Goodman, an analyst at Amherst Securities Group LP in New York, said in a telephone interview.

“Certainly, it appears that the Treasury has listened to first-lien investors,” Goodman said. Today’s announcement “goes a very long way toward addressing their objections,” she said.

Second-Lien Program

The second-lien program should be up and running in about a month, the officials said. They estimated that about 75 percent of all U.S. mortgages are managed by servicers that already have agreed to participate in the government’s modification programs. Servicers are administrators in the relationship between lenders and borrowers.

The mortgage initiative offers subsidies to servicers and lenders, including bond investors, to help lower borrowers’ housing payments to 31 percent of their income. Because modifications are voluntary, the Treasury is offering incentive fees to encourage participation in the program.

The $12,000 in possible incentive fees has several components. Many of the fees are paid over time, as an incentive for borrowers and servicers to strike deals that will last.

When modifying first mortgages, servicers can receive $1,000 up front, and $1,000 per year for three years. If the mortgage being modified is eligible and not yet delinquent, they can also receive $500, for a maximum possible total of $4,500.

Reducing Principle

Then borrowers who make their new payments can get up to $1,000 per year for five years, up to a total of $5,000. This money is paid to the lender or investor who holds the first mortgage, and it reduces the borrower’s principle.

When a second mortgage is also modified, the servicer on that mortgage can get a $500 up-front fee, plus $250 per year for three years, for a maximum possible total of $1,250. The borrower also is eligible for an additional $250 per year for five years, again paid toward the principle on their primary mortgage..."

"...The Treasury announced today that second-mortgage holders will be given a subsidy to reduce the borrower’s interest rates to as low as 1 percent. Alternatively, the lien holder could receive as much as 12 cents on the dollar to retire the debt. There also are incentives in place for first-mortgage holders.

In the case of a sample borrower with a $250,000 interest- only first mortgage with a 6 percent rate, leading to housing expenses equal to 40 percent of the borrower’s income, the government may pay about $2,625 annually to help reduce those payments for five years, according to an Amherst Securities Group report in February.

If that borrower also had a $43,942 second mortgage with an 8.6 percent rate, the government may bear half of the $2,336 annual cost of reducing the payment for five years under the plan announced today, according to data released by the Treasury..."

Even more insight from a recent Associated Press article:

"...During the housing boom, lenders readily gave out "piggyback" second loans that allowed consumers to make small down payments or avoid them entirely. While home prices soared, such mortgages were even extended to borrowers with poor credit scores and people who didn't provide proof of their incomes or assets.

But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.

The new plan aims to get rid of that roadblock, administration officials said. "We're offering even more opportunities for borrowers," Treasury Secretary Timothy Geithner said in a statement.

The new incentives are estimated to help up to 1.5 million borrowers with second mortgages, Housing Secretary Shaun Donovan said. While data on how many household have been helped by the Obama administration's housing plans are not available, Donovan told reporters there have been "hundreds of thousands of applications."

The administration's second mortgage initiative will be funded out of $50 billion in financial rescue money already allocated. As an incentive to modify second loans at lower interest rates, mortgage companies would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn't default.

Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage, and the government would pick up part of investors' costs as well. Lenders would also be given the ability to remove second mortgages entirely in exchange for larger government payouts.

The administration also plans to give mortgage companies $2,500 payments to entice them to participate in the "Hope for Homeowners" program. It was launched by the government last fall but has so far has been a failure, proving unattractive to banks required to absorb large losses.

It was supposed to allow 400,000 troubled homeowners to swap risky loans for traditional 30-year fixed-rate mortgages with lower rates. Instead only one loan has received final approval, with about 50 more in the works and fewer than 1,000 applications.

The program has been stymied by high fees, complex regulations and a requirement that banks absorb large losses. The Obama administration supports legislation in Congress to ease those restrictions.

Meanwhile, the faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm..."

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Homebuilders Offering Mortgage Rates Below 4 Percent

Home builders Offering 4 Percent Mortgages

Home builders like Lennar, Hovnanian Enterprises and Toll Brothers are offering qualified customers mortgage rates below 4% in an effort to generate sales. Here's a clip from a recent WSJ article:

"...As mortgage rates fall to near historic lows, some home builders are offering even lower interest rates, in an effort to lure buyers amid the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.'s recent offer of a 3.99% rate sparked "underwhelming" interest from home buyers, says Dan Klinger, president of the builder's mortgage operation. "It wasn't like we needed crowd control," says Mr. Klinger.

Earlier this year, luxury builder Toll Brothers Inc. was offering a 3.99% interest rate in many of its developments nationwide, but today that rate is no longer available nationally. Toll executives have said that the promotion boosted traffic to its Web site, but the low rate alone hasn't been enough to break weak consumer confidence that is still weighing on the market.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

Since the downturn began, builders have tried everything from free tropical vacations to subsidized closing costs in order to move inventory. They then cut costs and even offered layaway plans for down payments.

For home buyers, the low mortgage rates from the builders represent significant savings. But be wary of the fine print: Lennar is offering the 30-year rate "on select homes," and the loan amount cannot exceed $417,000. The minimum credit score is 700, which is a relatively high score in the current environment. In addition, it could be hard for buyers to come up with the minimum 10% down payment that Lennar requires to qualify for the 3.625% rate.

The builders' low rates may help first-time home buyers, "but it's not going to goose the trade-up market," says Thomas Lawler, a housing economist. "That's because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn't exist any more."

KB Home is one builder that isn't chasing buyers with low mortgage rates, for now. Instead, the Los Angeles builder is focusing on offering smaller houses that are competitively priced with foreclosed houses. The strategy seems to be helping KB, which reported on Friday that its sales improved more than some analysts expected..."

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Tips for Surviving A Recession

Americans are worried about their finances, and they're angry with their government. The federal government is borrowing tens of billions of dollars to keep zombie banks and corporations alive, while at the same time offering limited help for individual Americans who have always been responsible with their finances. Regardless of what the government is doing, middle-class families, small business owners and everyone else who's feeling the pinch of this recession should do what they can to survive. Here are some recession survival tips:

• Become An Indispensable Employee - Layoffs are happening everywhere; no sector of the economy is safe. A sound workplace strategy: become the employee that your company can't do without. You don't have to suck up to your boss, but there are things you can do to make yourself stand out in the crowd. Be the employee who shows up to work early and leaves late. Make a point of showing off to your boss just how productive you are. Every once in a while, make intelligent recommendations on how the company you work for can save money. When you see a conflict flare up, be the level-headed mediator who resolves the problem.
  
  
• Get Rid of Your Debt - Don't get into the mindset that having credit card debt is OK. It's not OK. Even if you have only a few hundred dollars of credit card debt, and you're paying interest on that debt, then your finances need fixing. Cut back on extraneous expenses and pay your credit card debt down to zero as soon as you can.
  
  If you have old credit card accounts that you don't use, keep these cards open. This will help to keep your FICO® credit score healthy. If you recently used an old credit card to make a small purchase so that your bank doesn't close the account, that's fine. But pay that balance down to zero right away. You will reap no benefit from paying down a credit card balance over time, large or small.
  
  
• Stay Fit! - We all know that there are unnumbered benefits associated with physical and mental fitness. One of the most overlooked is the amount of money it can save. You can't prevent the medical bills associated with e.g. a car accident but, by staying in shape, eating right and not smoking, you can prevent maladies like cancer, type II diabetes, heart disease and hypertension. Medical bills can pile up extremely fast, and, if you're unfortunate enough to end up dealing with a protracted illness, you could end up losing your job as well.
  
  Keep your brain healthy by eating foods that contain omega-3 fatty acids as often as possible. Sardines, salmon and fish oil pills are all good picks. If you want to have a great mind into your old age, exercise and cultivate your brain by learning new skills like a new language or new dance steps. When you're bored waiting in line somewhere, count backwards in your head. Start with the number 300, then subtract seven or nine (not an easy decrement like two or five), and keep going. A healthy, productive brain is the best tool you can have to build wealth in any economic climate.
  
  
• Boost Your Rainy-Day Fund - Your goal should be to have enough cash in the bank to survive for a year if you lost your main source of income.
  
  
• Invest In Gold and Peer-to-Peer (P2P) Lending - Right now, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are off more than 45% from their October 9, 2007 peak. Bottom line: stocks aren't looking good right now. Moreover, since stocks have become unattractive to both institutional and individual investors, lots of Wall Street money has been moving to the safety of government securities, driving yields way down. Investing in gold makes perfect sense right now. The Fed and the Treasury department have been pumping vast quantities of cheap cash into the economy, which will cause inflation to flare up like an ulcer down the road. Investors will move their money to gold even faster than they are now, driving its price upward.
  
  P2P lending is also a great investment option right now, if you can tolerate some risk. For example, at Lending Club, the average return is 9.05%. Where else can you help yourself with a high rate of return, while helping worthy borrowers who can't find loans elsewhere?
  
  
• Sell Stuff on eBay and Craigslist - You know you have lots of stuff around the house that you could sell on eBay.com, so just sell it. Better yet, list your stuff on Craigslist.com for free. Whenever you pick up an item in your home and say to yourself, "Nah, that couldn't sell on eBay or Craigslist," snap a few photos of the item and list it. Just about anything can be sold online; this is especially true today as this recession has turned many consumers into serious bargain hunters.
  
  
• Refinance Your Mortgage - Right now, the Federal Reserve and the Treasury Department are working together to keep mortgage rates as low as possible. The average refinance rate is expected to fall and remain below 5% for some time, which makes it a great time to get out of a high-rate mortgage. To get the best rate, make an effort to get your FICO credit score above 760 (720 is no longer considered top-tier.)

If you don't like what the government is doing with your tax dollars and money it's borrowing from other countries then contact your representatives in the House and Senate. But don't waste too much time and energy complaining. Every morning, remind yourself to focus your efforts on increasing your income and net worth. This recession has the potential of lasting two years or more, so even wealthy families are cutting back and preparing themselves for the worst. The key to surviving this economic downturn is to build and preserve wealth, but never overlook the importance of preserving your mental and physical health.

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Interest Rates Are Rising, Which May Translate to Financial Dire Straits for Those with Adjustable-Rate Mortgages (ARM's)

The Prime Rate has been on the rise since the summer of 2004, and with rising interest rates comes higher minimum payments on revolving credit card balances, higher payments on Home Equity Lines of Credit (HELOC), and, for those who opted for an Adjustable-Rate Mortgage (ARM) that's tied to the Prime Rate, it means that the mortgage bill has been eating up more and more of the household budget (depending on when the low interest "teaser" period ended.)

Quick Tip: A Home Equity Loan (HEL) is typically more
consumer-friendly than a Home Equity Line of Credit (HELOC).

When compared to other mortgage products, ARM's are often easier to get, and sometimes borrowers signup for ARM's that they can't afford: when the low interest period on the ARM ends, the monthly payment then rises to a level that the borrower didn't anticipate, and can't manage. This can mean serious financial trouble for the borrower, even foreclosure in the worst cases.

The folks at Bills.com recently issued a press release with some great tips on how to avoid the financial headaches that often accompany rising interest rates. Here's a clip:

"As any real estate agent knows, home sales heat up with rising temperatures every summer. Now, with mortgage interest rates more than a full point higher than at this time last year, fuel costs riding high, higher minimum credit card payments and consumer debt still raging, many U.S. homeowners risk foreclosure on their homes -– but they don’t have to lose their slice of the American dream.

'Last year, 31 percent of home loans issued were adjustable-rate mortgages (ARM's), which could spell big trouble as fixed mortgage rates hover around 6.83 percent and ARM's are poised to go much higher,' said Brad Stroh, chairman of Bills.com. 'Holders of ARM's will be paying an additional $14 billion annually for every 1 percent increase in mortgage rates. People who bought homes at the edge of their spending ability with an ARM could face dire consequences as their mortgage payments increase -- but they can take steps to keep their financial situations in check.'

According to the Mortgage Bankers Association of America, 4.7 percent of U.S. mortgages were delinquent at the end of 2005. With $9 trillion in outstanding U.S. mortgage debt, that places $423 billion at risk of foreclosure. Homeowners who are at risk (as well as prospective homeowners) can use the tips below to avoid mortgage trouble.

How to prevent problems:

• Create a budget and don’t stretch yourself too far. The unexpected can and does happen to millions of Americans each year. For people who live at the far edge of their means, one life event can hijack their lives and lead to defaults on bills and/or mortgage payments. The key is to build a detailed budget of income and expenses, making sure to allow some breathing room to weather an unexpected downturn.
  
• Be very careful with ARM's or interest-only loans. These types of loans let borrowers qualify for more expensive homes -– but beware as rates (and payments) climb. If you can barely afford the payment on your ARM or interest-only mortgage, you are asking for trouble in a few years when the 'teaser period' expires and your loan re-sets to a fixed rate. Be sure you have extra cushion in your budget with these loans.
  
• Don’t jump to refinance your home to pay off credit card debt. Many people faced with large credit card debt or other unsecured debts consider refinancing their homes. But this strategy only moves the debt, securing it with your home. That puts your home is at risk of foreclosure if you are unable to pay. If you are not confident that you can keep up with your home loan payments, consider debt resolution or another debt relief option.

'We can’t emphasize enough that people must educate themselves about what they're getting into with a mortgage,' Stroh added. 'Overall debt problems will continue to escalate unless people rein in their spending to live within their means. Unfortunately, for some people, that may mean losing their home to resolve their financial situation.'

How to avoid foreclosure -- if it’s already on its way:

• Enter into a forbearance agreement. For a temporary hardship, lenders might grant a forbearance agreement to lower –- or eliminate –- payments for a limited time.
  
• Consider loan modification. A loan modification seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or incorporating any delinquencies into future payments.
  
• Obtain a 'deed in lieu' of foreclosure. A 'deed in lieu' essentially allows the borrower to return the title or deed of the property -– giving the home back -– to the mortgage holder to avoid foreclosure.
  
• Sell the home. Selling your home may not be ideal, but it is a way to avoid foreclosure proceedings on your house and pay back your lender.
  
• Refinance the loan. It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment. Educate yourself on current rates by checking online rate comparison sites and using online calculators to determine the real costs of refinancing. These tools are available on a number of Web sites, including http://www.bills.com/calculators/.
  
• Be cautious. Be wary of so-called equity skimmers. If your house is facing foreclosure, you will probably receive numerous solicitations from companies looking to 'help' you prevent foreclosure by offering to sell your home for you or by taking ownership of your home. In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators aim to snatch the equity you have built up in your home.

In many states, foreclosure rates have already started to increase, especially impacting the segment of the population that carries adjustable-rate mortgage loans, whose payments climb upward with every interest-rate increase. However, homeowners can make choices -– ideally, before they purchase a home, but even after problems arise -– that will help them keep a home, or at least minimize the damage a foreclosure could have on their futures."

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How To Qualify for The Best Possible Rate When You Refinance Your Mortgage? For Most Lenders, It's All About Documentation

If you are in the market for a mortgage refinance, it's critical that you have all your documentation ready before you apply for the loan: being well-prepared with the right documentation is key to getting the best possible interest rate with just about any mortgage refinance provider.

For more tips, here's a snippet from today's press release:

"How do you qualify for the best interest rate when refinancing your home mortgage? To lenders, it’s all about documentation. The better you can document your income, assets, and employment, the higher your chances are for getting lowest interest rates. Here are some tips on qualifying for the best rate when refinancing your home mortgage.

When applying for a home loan, you want to have your paperwork in order, ready to be provided to your loan officer. If, for any reason, you are unable to document some of your income or assets, let your loan officer know at the time of the application. You don't want to waist time chasing something that you don't qualify for. You want your loan approved, your rate locked, and your loan funded. Here are some of the most important qualifying criteria.

On conventional loans, your monthly mortgage payment, together with minimum monthly payments on your other financial obligations, such as credit cards and auto loans, can not exceed fifty percent of your gross monthly income. Your income can be verified with your W2 or 1099 forms, or your tax returns. On top of that, you have to verify that you have two months worth of your proposed monthly mortgage payments. Assets must be liquid, such as cash in the bank, 401K, IRA, etc.

If you can not meet all of the above mentioned requirements, you can still qualify for a low rate. But your rate will be slightly higher as you move down the list of available programs:

• No income, but verifiable assets and employment
  
  
• No income or assets, but verifiable employment
  
  
• No income, assets, and no employment"

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