WASHINGTON (CNNMoney.com) — As the economy begins to mend, the cost of borrowing money for a big purchase could start to increase.

Mortgages, in particular, have flirted with record lows during the recession. Credit card rates have been bouncing upward and, while auto loan rates are expected to stay low for a little while longer, they can’t stay low forever.

The Federal Reserve has played a key role in keeping the cost of borrowing so low, through the so-called fed funds rate, a benchmark that determines the interest paid by consumers and businesses on a wide variety of loans. That has been near 0% since December 2008, as the central bank worked to spur greater lending and economic activity.

But as the economy heals, that rate is sure to come up, as will the cost of a lot of loans – although economists assure that borrowing costs won’t rise until the economy is ready for it.

“The important thing to remember the Federal Reserve has a mandate to maximize employment and keep inflation low, so interest rates may be going up, but it will be in the context of better job growth,” said Zach Pandl, an economist at Nomura Securities.

Mortgages: Apart from what the Fed does on interest rates, economists and Fed officials have been predicting higher mortgage rates for several months, as the Fed winds down credit programs that artificially spurred cheaper loans.

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Real estate prices are low, but the lack of available financing is preventing people from taking advantage of them. This of course presents an opportunity for investors. By providing hard money loans, investors can make a healthy profit with low risk. See the following article from REIClub for more on this.

It is a truism in real estate investing that money is made when you purchase; the profit is realized when you sell. The problem for the investor is that everyone is trying to buy at a discount. The competition drives the price of any worthwhile property near or up to full market value. Even so called distress sales; foreclosure, bankruptcy, probate, divorce, can result in competitive bidding.

The internet has been a great friend to the seller of property. Fifteen years ago someone with property to sell either had to accept a discount for a quick sale from one of the all cash “we close quick” buyers or spend months waiting for an offer while his property was listed in the “MLS Book”. Now, information about a property for sale is instantaneously transmitted to potential buyers worldwide. We have sold Houston apartment buildings to California based investors, a Bryan, Texas office – warehouse to a Singaporean transportation company, and an Austin church building to a Dallas based ministry looking to expand.

In years previous, being an all cash buyer allowed me to purchase property at 70 – 80% of real value. However, for the reasons mentioned above being an all cash buyer no longer warrants a 25% discount (by the way we are talking about REAL current value here, not some inflated appraisal done one year ago before prices dropped 30%). Going to auctions, subscribing to foreclosure listings, contacting probate lawyers, were no longer generating the deal flow I needed.

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The number of homeowners who have received modifications of their existing mortgages under the Federal government’s HAMP (Home Affordable Modification Program) continues to climb. More than one million modifications of existing mortgages are active, as of the recently-released February stats. The percentage of modifications that have hit permanent status has also risen, to 17 percent from 12 percent the month before (you undergo a trial modification before being offered a permanent one).

The latest report released from the government is titled the “Making Home Affordable Program Servicer Performance Report through February 2010.” It’s ten pages and contains some interesting data. Did you know, for instance, that of the 6 million loans that are overdue by 60 days or more, some 800,000 are ineligible for HAMP modifications because they’re on investment or vacation homes?

Watching the banks, every month we report what percentage of eligible loans are being modified — sorted by bank. What follows is our report card for March, which presents grades for the month of February. Note that the slow banks from the past couple of months are still slow, with Irving, Tex.-based American Home Mortgage Servicing, Santa Ana, California’s Carrington Mortgage Services, Sacramento, California’s HomeEq Servicing, and North Las Vegas, Nevada’s Wachovia Mortgage still clustered at the bottom of the pack.

On the top-performing end, GMAC beat out Citimortgage this month. Of GMAC’s mortgages that are eligible for modification, at least 53 percent are in a trial modification, edging out Citi’s 52 percent.

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With the Obama administration and private lenders considering mortgage principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued a new advisory for taxpayers who receive such assistance.

The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt in excess of $600 as ordinary taxable income to the recipient.

However, under legislation that took effect in 2007, certain home mortgage debt cancellations – such as through loan modifications, short sales or foreclosures – can be exempted.

Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., said her agency is working on a new program to expand the use of principal mortgage reductions to keep underwater borrowers out of foreclosure. Major banks and mortgage companies have preferred monthly payment reductions and other loan modifications over cuts of principal balances, but some have made limited use of the concept.

One of the largest servicers of subprime home loans, Ocwen Financial Services of West Palm Beach, Fla., has strongly advocated principal reductions to keep people out of foreclosure, and it has claimed broad success with them. Ron Faris, president of Ocwen, told a congressional subcommittee this month that, compared with borrowers who receive partial forgiveness on the principal, those with negative equity can be twice as likely to re-default after a standard payment-reduction loan modification.

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Q. My wife and I are considering buying our first home this summer. The only thing we have done so far is poke around the Internet to learn about the process. It appears that an FHA loan is the most suitable for us because we don’t have a lot of cash for a down payment. I’m wary of programs sponsored by the federal government. Would you recommend an FHA loan to a first-time homebuyer?

A. As a matter of fact, I would – not necessarily because you’re a first-time homebuyer, but because it would allow you to purchase the home with a low down payment. During the housing boom, FHA loans were largely replaced by more attractive conventional loans that offered little or no down payment. Since the mortgage meltdown, FHA loans have regained favor.

Let’s review the details of an FHA loan. First, it is not a government-sponsored program. FHA loans are insured by the Federal Housing Administration, a division of the Department of Housing and Urban Development. The mortgage insurance provided by FHA entices lenders to make FHA loans. FHA loans have been available since 1934.

Perhaps the first thing to say is that U.S. taxpayers do not foot the bill to pay for the insurance to cover FHA loans that go sour. FHA is a self-funded program because borrowers are required to pay a mortgage insurance premium (MIP).

The insurance is paid in two ways: An upfront fee of 1.75 percent is charged and usually is added to the loan amount, and 0.55 percent of the loan amount is charged annually and paid in monthly installments with the mortgage payment.

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Some financial planners advise making two half payments on your mortgage each month instead of one full sum. The idea is that homeowners will save thousands of dollars over the years in interest payments. Does this idea hold water?

Finance blog The Simple Dollar posits that, assuming your lender allows you to split your monthly payment without penalty, the plan just might work. Your next job, then, is to find out when your interest gets compounded. If it’s only monthly, then half-mortgage payments won’t do a thing. If, however, your interest compounds based on the average monthly balance, paying it down partially mid-month will end up saving you money over time.

If you decide to go this route, you can just pay half the balance twice a month on, say, the 15th and the last day of each month. The full post, however, suggests another way.

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Washington, D.C. – March 9, 2010 – (RealEstateRama) — Speaker Nancy Pelosi released the following statement today on the Treasury Department’s allocation of $700 million to California’s housing finance agency under the President’s most recent $1.5 billion initiative to prevent foreclosures in the five hardest hit states.

“Today’s announcement is a step in the right direction for many California families at risk of losing their homes. With a 49 percent drop in housing prices since their peak, and 12.4 percent unemployment, California faces unique challenges that require effective local responses.

“With this allocation, California’s housing finance agency will now have $700 million for innovative solutions to the foreclosure crisis. These solutions include mortgage principal forbearance, principal reduction for borrowers with significant negative equity, and assistance to unemployed persons. More California residents will receive the help they need to stay in their homes and communities will emerge stronger as a result.

“With so many households underwater and facing mortgages they can no longer afford to repay, California is grateful for the Obama Administration’s latest effort to tackle a difficult challenge that is at the root of our economic downturn.”

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Targeting California and the four other states hardest hit by the housing crisis, President Obama on Friday offered a $1.5 billion “innovation fund” to devise solutions for homeowners struggling against foreclosure.

“What we can do is help families that have done everything right to stay in their homes,” Obama said at a town hall meeting in Nevada, a state where 65 percent of homeowners are underwater – the term for owing more than a home is worth. “This fund is going to help out-of-work homeowners prevent foreclosures.”

California, Nevada, Arizona, Florida and Michigan, the states to receive the funds, all have seen prices tumble more than 20 percent from their peak. The $1.5 billion, which comes from the Troubled Asset Relief Program, will be divvied up based on the states’ home-price declines and unemployment rates. Housing finance agencies in each state must submit program plans to the Treasury Department for approval.

“We think it’s a very positive thing and will help a segment of the market depending on how big our allocation is,” said Ken Giebel, director of marketing for the California Housing Finance Agency, which focuses on affordable housing and help for first-time home buyers. “Our job will be to help as many people as we can.”

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Will these 10 firms’ high default ratios wind up costing taxpayers a bundle?

If you read the news everyday, you’ve probably seen more and more headlines like these in recent months: “Government Shuts Down Troubled Mortgage Firm” and “HUD Probes High-Default Lenders.”

Such language might lead you to believe that the feds are weeding out bum lenders. What you’d be missing is that even after the feds zero in on suspect mortgage outfits, there’s still a good chance they will continue to put taxpayer dollars in jeopardy for years to come.

For a Top 10 list of Uncle Sam’s biggest deadbeat lenders, click here.

First, a bit of background. The federal government has for decades guaranteed mortgages for low-income home buyers who would have a hard time securing a loan without help. In return for a premium of 1.75% of the loan amount, and proof of a 3.5% down payment, the government will back new mortgages through the U.S. Department of Housing and Urban Development’s (HUD) insurance agency, which is known as the Federal Housing Administration.

The FHA-insured loans are made by private mortgage companies, which are in turn monitored by HUD. FHA lending has quickly become big business because an increasing number of would-be home buyers are turning to it for mortgage assistance.

A few years ago FHA-insured mortgages represented just a small percent of the home loan market. These days it is backing roughly one-third of mortgages. HUD hasn’t thus far needed taxpayer funding to run the FHA. But the chances that it might some day appear to be growing, and quickly.

As the FHA’s market share has increased, so has the default rate on loans originated by mortgage firms it backstops. Some firms are a far bigger part of the problem than others, as the accompanying list below indicates.

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