Mortgage Lender Atlanta » Interest Rates

If You Don’t Buy a House Now, You’re Stupid or Broke

Jim Duffy — Tue, 15 Dec 2009 20:15:23 +0000

I don’t normally re-post articles – but despite the jarring title, I really liked this article from Marc Roth that appeared in Businessweek Magazine last week. And, I agree. Rates are going higher on Atlanta home loans, and precipitously so in the second quarter of 2010 if things remain on their current track. Enjoy this read:

Well, you may not be stupid or broke. Maybe you already have a house and you don’t want to move. Or maybe you’re a Trappist monk and have forsworn all earthly possessions. Or whatever. But if you want to buy a house, now is the time, and if you don’t act soon, you will regret it. Here’s why: historically low interest rates.

As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That, as the graph above—which you can find on Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.

In fact, rates are so well below historic averages that it should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity.

And it is exactly that, based on what the graph shows us. Let’s look at the point on the far left.

In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers.

But they weren’t happy soon thereafter. From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one of my previous articles, my dad was one of those unluckily stuck needing a loan at that time.

INTEREST RATE LESSONS

And when rates started to decline after that, they took a long time to recede to previous levels. They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990. For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%. We’ve since spent the last nine years, until very recently, at 6% to 7%. So you can see why 5% is so remarkable.

So, what can we learn from the historical trends and numbers?

First, rates have far further to move upward than downward; for more than 30 years, 7% was the low and 18% the high. The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years.

Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low.

Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.

Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed. While different in each region, for the sake of simplicity, let’s assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide. Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.

LOAN COSTS

Stay with me now. We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let’s put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

What I’m trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.

Is Today The Beginning of Higher Rates

Jim Duffy — Tue, 01 Dec 2009 22:16:27 +0000

As you can see from the chart below, rates have been steadily getting better over the month of November. Remember that as yields increase, rates decrease. In fact, as of this morning we were on track to match the best rates of the year.

What a month November was for rates; and based on this first day of December, this month could be just the polar opposite. If you look closely, we may get lucky and find a short-term floor of support on the 10 day moving average. More likely, however, is to find that floor on the 30 day average.

And that spells a hike in mortgage rates that would not be much fun at all. Hang on tight, we may be in for another wild ride. Oh, and if you have been on the fence considering refinancing, then jump in and let’s do it, before it is no longer available.

Why Rates Will Move Higher, and When

Jim Duffy — Thu, 08 Oct 2009 21:12:50 +0000

Mortgage interest rates for Atlanta home loans are terrific, we all know. As of this writing, 30 year fixed rates are in the 4′s. Great!

But, mortgage rates are that low because of artificial forces – the Fed – forcing them down. And that card is just about played. So, rates will go up; and as you can see in this video, probably fairly dramatically.

Points vs. No Closing Cost Loans

Jim Duffy — Sun, 20 Sep 2009 18:39:13 +0000

When being presented with standard closing costs, it is fairly easy to compare loan options. But, what happens when you enter the dark world of lender jargon and consider no closing cost, or lender-paid closing cost loans, or *gasp* you consider paying points. This video should be useful to decipher that underworld, jargon-filled land of mortgage lending.

So, if you are searching for a home around metro Atlanta, then you owe it to yourself to spend time determining your options up front.

The Time to Buy or Refinance a Home is Now!

Jim Duffy — Mon, 06 Jul 2009 14:16:06 +0000

I perused this article this morning, which is one of many that back up what I have been saying in this blog for some time now. Once the Fed stops buying Mortgage Backed Securities, mortgage rates will increase. And, probably dramatically so. Recently, I saw a Mortgage Bankers Association article which indicated that the Fed is currently buying 85% of the MBS that are being sold.

That is a number to give you pause: 85%. It is highly unlikely that other buyers will step in to fill that gap when the Fed stops buying. So, what will happen? Only one thing can happen. Mortgage interest rates will rise. Will they double like the above article says? Perhaps. But even if they go up by 50%, that still puts a lot of perspective home buyers out of the market.

So, if you are going to buy, buy now. And, if you are going to refinance into a long-term fixed rate loan, do so now. You will be happy that you did.

Tough (Economic) Love

Jim Duffy — Wed, 25 Feb 2009 13:33:57 +0000

Peter Schiff wrote a compelling article spelling out the possible scenarios for the economy. I have linked to it above, and I hope you will go and read it. I think you will find it compelling; even if, in good Peter Schiff style, it is spelling out the worst scenarios and makes you shudder a bit.

After briefly recapping the subprime and credit implosions, and pointing fingers of blame where due, he asks if on a grander scale the US Government is not falsely propping up an economy of consumer excess? Then, if you accept that premise to be true, what would happen to immediately bring our economy to it’s knees – or put us on life support – if foreign governments stopped buying our debt in the form of bonds.

Well, admittedly it would not be pretty; and it would be painful.

But beyond Schiff’s facade of being Paul Revere in this whole economic mailaise, he, too, is an optimist. I think Schiff believes, as I do, in the American spirit which accepts adversity and grows stronger and flourishes from it.

If the worst in the economy is ahead of us, here’s what I would suggest:

Credit will tighten more. Right now if a borrower has decent credit, it is quite possible to get a very favorable rate on a home loan. That would change, largely due to the false lows in mortgage rates going away as the Fed would stop buying Mortgage Backed Securities.
Goods and services would escalate in price, due to inflation and the rapid constriction in free-flowing credit.
Many companies would simply have to shut down, and jobs would be lost.

If all of that happens, then there will be no more ‘keeping up with the Joneses’. Maybe we will focus on simpler pleasures in life, while shouldering the responsibility of rebuilding an economy based not of consumption, but on savings and industry. It would not happen overnight, but you would be surprised what a decade can do.

So, hope for the best and prepare for the worst. How? If you are in a position to purchase a home around Atlanta – do so now. Because home prices are down to the lowest levels in decades and long-term fixed mortgage rates are also at their lowest levels in decades. That will not last.

And, simplify your lifestyle. Cut back where needed in order to save and sock away more.

Peter Schiff would tell you to invest in Asian stocks. Fine. If you want, he probably has very good advice there. I say, there will be strong survivors in the US economy. More importantly, there will be new businesses and industries popping up, run by new entrepreneurs. Be nimble and ready to capitalize on those, as well.

No one said that being part of the greatest nation on Earth would be easy. Because a nation is made up of people, I believe that Americans will be just fine, and we will show our true colors as we – potentially – lead the world out of this recession and rebuild on a stronger, more solid economic footing.

The Fed May Have Another Trick Up It’s Sleeve

Jim Duffy — Wed, 28 Jan 2009 14:12:34 +0000

The Meeting of the Federal Reserver Board will adjourn at 2:15pm today, and as is customary, Fed officials will speak. Normally, we have waited to see if the Fed will lower (or raise) interest rates, and both stock and bond investors respond accordingly. They cannot do that today, because the Fed Funds rates sits at .25%.

So, what can they do that will have any effect? Plenty. And from this article form Yahoo Finance page, it appears the Fed may begin to buy up other consumer debt securties, such as car notes, student loans and credit card debt-backed securities. Just like they are buying up Mortgage Backed Securities, which is what is causing mortgage rates to remain as low as they have. Sort of an artificial low.

The interesting this in the article cited above is that the Fed may buy up long-term Treasury securities.

Huh? Doesn’t that strike you as the the same as an average American paying off one credit card balance with a new credit card, to allow more room for spending on the original card? That was my first impression.

So, we will see. The thing to watch for in the Fed comments is a fear of increasing inflation. I do not expect that at all at the end of this meeting, but the mere mention of inflationary fears will send mortgage rates up. Anything else, should be good for rates. Should is the key there, since the Fed is treading into unchartered waters, and there is no telling how investors will respond.

Inflation is Coming. Do You Know What to Do?

Jim Duffy — Sun, 25 Jan 2009 23:07:11 +0000

I have been saying for several months on this blog that Big Inflation is coming. And even several readers have commented back that everything seems deflationary, and wonder if I am seeing the same economy that they are. And I am, but I am looking out a few more months.

Inflation, essentially, is caused by a money supply that outweighs the goods and services being offered for those dollars.

So, I happened upon this article, by Adam Hamilton, in which the author makes a very compelling case for the reasons that the inflation that is coming is going to be big and ugly. He almost argues that the CPI numbers that measure inflation may be being under-reported, on purpose. Interesting, and if that is the case, then that under-reporting will not be possible once the inflationary causes begin to hit main street. Here is a quote:

Inflationary expectations hurt the stock markets, and weak stock markets hurt the economy as the stock panic abundantly proved. Scared citizens are not only harder to rule over, but they won’t vote for politicians’ reelections and they won’t be able to shoulder as big of tax burden to pay for politicians’ grand spending plans.

And inflation just around the corner is not good for a populus that has a slowing economy. We have all read about (and hopefully not experienced) the growing job losses, and an anecdotal phenomenon that I am seeing, is a growing number of employees taking pay cuts instead of incurring layoffs. Interesting.

Preparing for Big Inflation

The author of the article that I cited above suggests some things to do to prepare for and ride out the coming inflationary period. For those, just read the article. He is an investment advisor, so his suggestions are geared toward stocks, commodities and other investments.

I, of course, am not an investment advisor. If anything, I could be called a debt advisor, since that is what I deal in – helping people set up and manage the largest indebtedness that most people will take on in their lifetimes.

My advice, then. Take full advantage of these artificially low interest rates, and refinance the home. If you have unsecured debt such as credit cards, student loans or car loans, and you have the equity in your home to do so, then roll those debts into a new home loan in the high 4% to low 5% ranges, depending on how you qualify.

Then, get on that budget and savings plan that you have always talked about, even though it means cutting back a little on the nice things that you enjoy. And, if need be, do some things to bring in a little extra income.

But the refinance part, do it quickly. The reason is two-fold.

First, mortgage rates are artificially low right now, because the Fed is the main player buying Mortgage Backed Securities (MBS) – those bonds that drive the mortgage rates. They are planning on buying MBS through the end of June, 2009. Once they stop buying, watch for rates to take off like a missle.
And, second, when we do see inflation take hold, mortgage rates rise as bonds are shunned. The reason is that bonds and inflation mix like oil and water. They don’t. In fact they can’t, because by definition bonds offer a fixed rate of return on an investment. And that fixed rate, say 4%, is diluted more and more as inflation rises. If inflation is at 4%, then the real return on that 4% bond yield is…nothing. Right, inflation cancels the yield on the bond. So what if inflation hits 6%? Bonds are negative, and have to rise to compete.

So that’s it, two very real factors that will cause mortgage rates to rise in the near future. So if you want to see if you qualify to refinance your home, anywhere in Georgia, then call me or email me – jduffy at phoenixglobalmortgage.com, and let’s see what you can do.

Oh, and if you are in an adjustable rate mortgage (ARM) that will adjust in the next 12-24 months, you may be looking at the LIBOR (or other index your loan is tied to), and patting yourself on the back, looking at how much that rate is going to drop once it adjusts. You are right, for now.

But I suggest refinancing into a long-term fixed rate, now that rates are so low. The reason is that the most effective tool that the Fed has to combat inflation, once it takes hold, is to raise interest rates.

Although the LIBOR is not tied directly to the Fed Funds Rate, that will be rising, it does track that rate with a fair accuracy. Remember what Paul Voker did in the 70′s to reign in inflation? My parents’ generation is still talking about the double digit interest rates they bought their homes with. And we will have stories for our grandkids, before this is all over.

The Rate Roller Coaster

Jim Duffy — Thu, 22 Jan 2009 13:54:50 +0000

Rates have been rising somewhat dramitically over the past 7 days. But then, every time rates hit the lows, they have quickly shot up like a rocket, and tend to then float down like a feather. Be ready for a dip over the next few days.

Why? In news released this morning, housing starts stood at 550,000. Estimates were for starts to stand at 610,000. And that number caps the worst year for builders since 1959. In other news, weekly jobless claims stood at 589,000k, higher than estimates for a read of 548,000.

Remember, bad news for the economy usually causes a flight to safety, and bonds are the safe haven. Bonds, or Mortgage Backed Securities, rally, and mortgage rates drop.

If you are thinking of refinancing your home, or your second home in Georgia, let’s get the paperwork in, and lock on the dip in rates. You will be happy you did so, in hindsight.

Reduce or Consolidate Debt

Jim Duffy — Sun, 11 Jan 2009 03:32:37 +0000

In England, some credit cards are now charging 46% interest. Wow.

I will have to research to be certain, or maybe a reader knows and wants to post a comment, but I think in the US there are limits on the amount of interest that credit card companies can charge. But it is somewhere in the 30+% range. Which is ugly enough.

So, again I say, with even tougher times ahead for the economy, if you have significant credit card debt, and have some equity in your home, then it will make great sense to consolidate all that into a new home loan, with fixed rate home loans so low. Both conventional and FHA rates are still bouncing around historic lows, so now is the time. You will be happy you refinanced, if you jump on it now.