What the Bailout Means for Mortgage Rates, More

Falling home prices are the main culprit behind the big fat mess the American economy finds itself in now. The colossal $700 billion bailout plan Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are trying to push through this week is supposed to provide relief for the real estate market -- and ultimately stabilize prices.

The core premise of the plan is this: The government will buy mortgage-backed securities in the open market, allowing lenders to get dubious loans off their books. This comes just two weeks after the government agreed to give Fannie Mae and Freddie Mac up to a $200 billion capital infusion. Both actions are meant to stabilize the mortgage industry – giving lenders the confidence to extend mortgages, and financial firms the confidence to buy, hold and sell them.

But what does this mean for the little guy? The American who’s looking to finally sell his home, or buy a new one? The short answer is no one really knows. Still we posed the questions to experts in the field to get their insights.

Will consumers see a reduction in mortgage rates?

Maybe. "It's hard to know at this point," says Keith Gumbinger, vice president at mortgage-information firm HSH Associates. "Until we know the shape and size of the proposal [to buy up banks' bad assets], it's too early to know how the market might react to it," he says.

The 30-year fixed-rate mortgage averaged 5.98% Wednesday, according to Bankrate.com, up from 5.73% the previous week. Both are lower than the 6.66% borrowers could get in August 2007, when the credit crunch began to pick up steam.

It’s worth noting that these rates are quite good by historic standards, says Eric Tyson, co-author of "Mortgages for Dummies." Indeed, mortgage loan application volume increased 33.4% for the week ending Sept. 12 (after the government's bailout of Fannie and Freddie), according to the Mortgage Bankers Association's weekly survey. But during the following chaotic week (ending Sept. 19) -- which included a general undoing of the financial-services sector -- the index fell 10.6%. The association foresees more volatility until the markets can see what Congress ultimately passes.

Bottom line? No one can say for sure that rates will be a whole lot better, say, six months from now.

Will it be easier to get a home loan?

Borrowing requirements haven't changed much in the last few weeks. The tougher lending standards are still in place. To get the best rates, you’ll likely need a down payment of 5% and a credit score of 720 or higher, says Gumbinger. Another requirement: a lower debt ratio, which is the percentage of your income that goes toward paying debt. Before, you might have been able to secure a loan with a ratio as high as 55%, but these days the maximum is around 43%, says Gumbinger.

The good news is we probably aren’t going to see the requirements get any tougher – and down the road we could see those standards ease up, although we’re not going to return to the days where all you needed to do to qualify for a mortgage was prove you were breathing.

It's near impossible to say exactly when underwriting criteria will moderate, says Jason Bloom, president of the Washington Association of Mortgage Professionals. The consensus in the housing industry suggests that borrowing requirements won't see big changes until the market stabilizes. When housing values level off, "that seems to be when we'll see the markets and the lending industry revert back to some semblance of normalcy," allowing more consumers to qualify for mortgages, he says.

Still, if you qualify, now is a good time to be in the market. "If you've got financing, you can buy a house at prices 30% to 40% of what homes sold for a couple years ago,” says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. See tips on how to increase your credit score.

Will home prices begin to rise?

That’s the $700 billion-dollar question. Obviously, "you're not going to get top dollar selling today," says Tyson. But waiting this out may not necessarily be the right move either. While prices may stabilize over the next year, we aren’t likely to see the kind of rapid appreciations that will add significantly more dollars to your pocket any time soon, he says.

The National Association of Realtors is predicting that housing prices will start to recover in 2009. Most recently, the group reported that while existing home sales fell in August, total housing inventory saw a 7% drop. Sometime next year "we think inventory will be drawn down to a point where aggregate prices will begin to rise," says Walter Molony, NAR’s spokesman.

6 Ways to Save on Homeowners Insurance

Strapped consumers often look to their homes as a potential cash cow. However, these days taking out a home equity loan or line of credit is practically a pipedream. But there is one way to reap some financial benefits from your home: through homeowners' insurance.

Premiums on homeowners' policies can cost thousands of dollars a year, but they don't need to be so pricey. Insurers base their premiums on the square footage of the home, the estimated cost to rebuild it, neighborhood crime and the relative danger of natural disasters -- almost all of which are constantly in flux. By reassessing your coverage and taking steps to lower your risk profile, you can keep hundreds of dollars in your wallet.

Seeking such savings should not entail cutting corners on your policy, though, cautions Noreen Perrotta, finance editor for Consumer Reports. Should an inadequately-covered home get destroyed by a fire (or any other disaster), the owner may not have enough money to rebuild it.

Here's how to save without putting your home at risk:

Maintain a healthy credit score

A poor credit score does more than hurt your chances of landing a loan. Coupled with negative factors, such as a history of late payments or numerous insurance claims on your home, a poor score can prompt an insurer to raise your premiums, warns Loretta Worters, vice president for the Insurance Information Institute, an industry trade group. On the other hand, a stellar score serves as added proof to the insurer that they aren't taking too much of a risk on you, which can result in a better rate. (For tips on how to raise your credit score, read our story).

Inquire about discounts

Ask your insurance provider whether they offer a reduced rate for bundling policies, say, a homeowners and an auto policy, says Jeff Leiman, senior director of J.D. Power and Associates' insurance practice. Such a move can yield discounts of up to 15%. Also, some insurers offer loyalty discounts of 5% to 10% on premiums to customers who've held policies at least three years, reports the Insurance Information Institute. If you can't finagle a better rate in either of those ways, then shop around. Start by visiting rate comparison web sites like Insurance.com and NetQuote.com.

Increase your deductible

Just a small increase in the amount you're responsible for should disaster strike can pay off big in premium savings, says Perrotta. A homeowner who raises his deductible from $250 to $500 could save as much as 15% on monthly premiums. If they raise it to $1,000, they can save up to 25%.

Disaster-proof your home

Simple safety improvements, such as buying a fire extinguisher or installing a smoke alarm or deadbolt lock can reap a discount of up to 5% with most insurers, says Perrotta. Expect even bigger rewards for larger projects, like installing shatterproof windows (10% in windstorm-prone areas) or high-tech security systems (15% to 25%). Just make sure to check your insurer requirements before you start knocking out the windows.

Another potential safeguard: you. Most insurers offer discounts of up to 10% to retirees. The assumption is that retired people spend more time at home, therefore they can react swiftly to incidents such as a fire or a broken water pipe, says Worters.

Monitor neighborhood changes

Where you live is a primary factor in your insurance rate, says Worters. Alert your insurer to any changes in your neighborhood that could lead to a more favorable rating, and in turn, less expensive premiums. For example, new storm drains may prevent flooding, while installing extra fire hydrants and clearing brush from empty lots will help reduce possible fire damage.

Pay promptly

Insurers like to know your payments are a sure thing, especially in today's economy, says Leiman. Signing up for automatic payments that are debited from your checking account can often land a discount. Or, if you can afford it, pay your annual bill all at one time. That way, you avoid the monthly convenience fee of $2 to $5 that many insurers tack on.

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Assessing Insurance When You Buy

If plunging real-estate prices are enticing you to buy a home, make sure to factor in homeowners' insurance costs as you shop. "You may be able to afford the house, but find you can't afford the insurance," says Worters. Ask the current owner how much he pays, and consider these five factors:

Construction materials
Ask insurers which materials are preferred locally. A brick house in Long Island, N.Y., would get a favorable rate for its ability to withstand wind, says Worters. But the same house would be far pricier in Los Angeles, where brick is among the least stable in an earthquake.

Home systems
You'll pay up to 15% less if the home's heating, plumbing and wiring systems are less than a decade old, says Perrotta.

Flood zoning
If your home is in a zone at risk for flooding, it requires extra insurance -- adding an average $400 annually, according to the Insurance Information Institute.

Neighborhood
The home's proximity to a fire hydrant and the nearest police station, as well as its crime rate and other factors, help determine the risk level of your neighborhood. The more risk, the bigger your premiums.

Past claims
Ask the seller to provide a copy of the home's Comprehensive Loss Underwriting Exchange (CLUE) report, which details the property's history of insurance claims.