Wednesday, October 6, 2010

Fixed Rate Mortgages for the Chicago Market

Currently, the conforming loan limit for Fannie Mae and Freddie Mac loans is $417,000 in the greater Chicago market for 1 unit residential properties. The FHA loan limit is $410, 000 (base loan amount) for the greater Chicago real estate market.

As the name implies, a fixed rate mortgage is a home loan where the interest rate never changes over the life of the loan. The most common type of fixed rate loans are 15, 20, and 30 year fixed rate mortgages with the 30 year fixed being by far the most popular loan program in America. However, many homeowners are starting to appreciate the benefits of shorter term fixed rate loans such as the 10 and 15 year fixed. With a shorter term fixed rate loan, a homeowner will save tens of thousands of dollars in interest and enjoy the satisfaction of owning their home free and clear.

Each home buying and refinance situation is unique based on your financial strength as well as your short term and long term financial goals.

How are Rate Determined for Fixed Rate Mortgages?
While Interest rates will often closely follow the yields of 10 year Treasury Notes, they are actually determined by the movement of the Fannie Mae and Freddie Mac mortgage backed securities market. Typically, U.S. Treasuries and Fannie Mae mortgage backed securities are viewed as a safe haven in an uncertain investment climate. Therefore, you will typically see interest rates dip when the stock market declines.

Should I Pay Points?
One point is equal to 1% of your loan amount. So, two points on a $200,000 loan equals $4,000. Points typically lower the interest rate that you will obtain on your mortgage loan. Usually one point will lower your interest rate by .25%. To determine if it makes sense to pay points, you will need to calculate your break even point. To do this, divide the total cost of points paid by the amount of monthly savings. In the previous example, paying two points will lower your interest rate by .5% saving you approximately $60 per month. Therefore, it will take over five years to recover the cost of two points.

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