Mortgage Interest Rates

[trishguard]

Originally Posted by evilnewbie

Interests that low, even poor people can afford a home... now if we can get them to behave responsibly and get their credit ratings up... this is an incentive for them to start behaving like responsible people... I wish the government can lock that rate all year to give people an incentive to pay their bills on time... however this will not cure the underlying problem... a lot of people have too much debt and until they can relieve that debt (i.e. THEY pay it off), the economy is going to stay in a recession...

Responsible people? Like the middle class who took out heloc's to buy boats, cars, vacations, remodels, or just for cash? Poor people does not equal irresponsible. There are plenty of poor people who ask for nothing and live within their means.

[trishguard]

Originally Posted by Nepenthe

Let's say you buy a house at 4.5% now. Let's say the PITI is $1300/month, of which $900 of that is Principal and Interest. Let's say your net take home pay after withholding, 401K, and medical insurance is $3250/month.

So $1300/month is 40% of your net income, which is reasonable.

Then we have 10% inflation per year (this is hypothetical to illustrate a point). Prices for clothes, food, energy, electronics, furniture, etc. all go up. Your salary/wages will also increase. Your property tax and insurance portion will probably go up too, but the Principal and Interest portion will stay the same.

So you've "locked in" a certain P and I payment. But after five years of 10% inflation, your salary is now $5234/year (due solely to cost of living increases, NOT raises or pay grade increases). Your insurance and tax has increased at the same rate and is now $644/month. But your Principal and Interest is still $900. Total payment is $1544/month, which is now only 29% of your net income.

In addition, your house's appraisal value may also have increased significantly (meeting or beating inflation). It's just looking more attractive. I had completely turned off the idea of buying a house until I had saved up the whole purchase price, but that carries house appreciation and inflation risk for me. Buying the asset, especially at this low rate (if it happens), especially with prices low, and then letting inflation sort of work FOR me makes some sense. At least the model works...

Says who?

[Chef Boyardee]

Mortgage rates usually go down when the yield on the 10 year treasury bond goes down and up, when it goes up. Treasury bonds have been selling lately. They say part of the reason is that there is little concern over inflation right now (yields on treasuries have plummeted to 50 year lows, around 2.6% and they keep right on selling!) and, I would presume, a lack of interest in buying stocks or waiting with cash to buy stocks. Remember, the type of investor that buys 10 and 30 year treasury bonds also buys MBS (mortgage backed securities). An increase in the market for MBSs = lower rates for home buyers, because the bank can sell off their loan with a lower interest rate (buyers are willing to accept lower interest rates in times of high buying interest).

HELOC (home equity line of credit) loans are pegged to the interest rate that The Fed sets that is always in the news. Since that rate is 1% right now, interest rates on HELOCs is very low and will presumably, go lower. Of course, in a HELOC you don't have to wait, because it fluctuates "with" the fed rate.

In regards to the mortgage crisis, it is my understanding that banks have been lowering their lending standards since The FDR Administration. They've been doing so as a result of deliberate government policies to "encourage" them to. Remember, the mantra "low cost housing." That's what they really mean when they say it. Naturally, it is double talk; their policies always lead to high cost housing (ie the housing bubble that recently popped).

[Chef Boyardee]

In regards to Treasuries and MBSs, I do know that the market for MBSs has been lagging behind The Treasury market. They are supposed to run together. So, I would assume that Treasuries are as low as they are, because that type of investor is deliberately avoiding MBSs and as a result, is willing to accept lower interest rates on Treasuries. When confidence returns to The MBS Market, I would assume that Treasuries will rise significantly, as investors sell them off, in exchange for higher yielding MBSs.

This probably explains why mortgage rates aren't much lower than they are right now. Remember, Treasuries are at 50 year lows! Surely, interest rates on a 30 year mortgage have been lower than 5.5%!!!

What does this all mean for the future of mortgage rates

In the end, it seems clear that The MBS Market must provide confidence to Investors. Otherwise, they will demand higher yields to invest in them. Apparently, this is accomplished by "insuring" them (you buy the MBS and if mortgages in it default, you still get paid). However, it is my understanding, that Insurance Companies for MBSs failed, when home owners started failing in huge numbers on their mortgages. This isn't surprising. Imagine a life insurance company having 20% of its' customers all die in the same year! It isn't supposed to happen, but it did. Well, I don't think it should have been surprising that this happened, but I don't think our government cared, because they were much more interested in providing "low cost housing" (as in low payment, not principal!!!), which produced high cost housing (but it still gets them votes, so I guess they don't care). Unfortunately, our elites seem to have lost their morals.

[Chef Boyardee]

The best advice for everyone in this and every market: be frugal and prudent (always prepare for job loss, pay cut, disability, etc). Learn to trust each other and work together. Remember, you must earn each others trust. Support your family members. Be supportive to your husband and invest time and effort in leading your wife towards virtue, not vice. Protect yourself from influences that try to make you do bad things (i.e. television ads)

[Lulu101]

Use the Internal Rate of Return formula to compare the two options.

Originally Posted by HappyTexan

Nepenthe and Humanoid..wow, just wow.

I've been doing the same thinking about whether or not to keep saving for a cash purchase or go for a mortgage with a big downpayment sometime mid/late next year.

My wavering is also based on what I read today, what various economists are predicting and what my own feelings are for the future..inflation vs deflation.

Decisions, decisions.

[jdrtx]

1917: Immigration Act of 1917 ("Asiatic Barred Zone Act"). Denies entry to immigrants from the "Asiatic Barred Zone"--much of eastern Asia and the Pacific Islands. It also sets a literacy requirement for immigrants over 16 and a head tax for entry into the country; it bars entry by "idiots," "feeble-minded persons," "epileptics," "insane persons," alcoholics, "professional beggars," all persons "mentally or physically defective," polygamists, and anarchists.


Mach, Except the Asia part,it's assuming Congress can pass this test.