Conforming Mortgages below 5%

[santafe2]

I, and I'm sure others on iTulip have mentioned that the Fed is going to do everything they can to lower mortgage rates. Do we go to 4%? If you haven't done it already, this round may be your best and last chance to lock in a fixed long term low rate. You'll feel very smart in 5 years.

For a while Wednesday morning, people were getting conforming mortgages at less than 5 percent.


Glenn Floyd, in Wilmington, N.C., grabbed a 30-year, fixed-rate mortgage at 4.875 percent, paying half a discount point.


Has Lazerson ever seen mortgage rates that low? "No," he says. "Never. I'm starting on my 23rd year in the business. Never this low."


Rates didn't stay that low...but...There's reason to believe that borrowers will continue to have chances.


The Federal Reserve made it clear Tuesday that it intends to push mortgage rates down and keep them low for a long time.


Hoping to take advantage of low rates, masses of homeowners are calling loan officers and brokers to inquire about refinancing.


"While rates are not 4.5 percent on a refi, you sure as heck can get a 5," he says.


Even as rates rebounded above 5 percent on Wednesday afternoon, few mortgage people doubted that they'll drop again, probably not long from now.

http://www.bankrate.com/brm/news/mtg...nalysis_a1.asp

[we_are_toast]

Re: Conforming Mortgages below 5%

Who is this going to help?

If you loose your job, it doesn't matter what the interest rate.

If you had an ARM, chances are you don't qualify for a refinance because the new rate will still be much higher than the teaser.

This will mostly help people who weren't in danger of foreclosure anyway. So it's immediate help to mortgage brokers (fees) and a small break for mostly upper middle class people who didn't really need it to begin with, and WE are all going to have to pay for it. You get a slightly cheaper mortgage while your neighbors house gets foreclosed on your property drops another 10%.

This is a crazy waste of money in an attempt to keep the FIRE economy alive. Wrong solution at the wrong time.

[grizam303]

Re: Conforming Mortgages below 5%

Cool, I should have no problem refinancing with my negative $50,000 in equity.

It's like giving a starving man a set of silverware.

[Master Shake]

Re: Conforming Mortgages below 5%

I, and I'm sure others on iTulip have mentioned that the Fed is going to do everything they can to lower mortgage rates. Do we go to 4%? If you haven't done it already, this round may be your best and last chance to lock in a fixed long term low rate. You'll feel very smart in 5 years.

http://www.bankrate.com/brm/news/mtg...nalysis_a1.asp

I've started the process myself. Have about 50% equity; owe about 142K at 5.5% fixed. I want to take out about $40K to buy some essentials and have some emergency cash. Didn't know about the bump up today, but I'm in no hurry.

[c1ue]

Re: Conforming Mortgages below 5%

I, and I'm sure others on iTulip have mentioned that the Fed is going to do everything they can to lower mortgage rates. Do we go to 4%? If you haven't done it already, this round may be your best and last chance to lock in a fixed long term low rate. You'll feel very smart in 5 years.

I'd say it depends on your local housing market situation.

Taking out another loan is basically borrowing money to speculate - again that is 2 risks instead of one: the first a bet on housing price, the 2nd that your speculation will gain instead of lose.

Refinancing in turn also has costs: basically all the interest you've paid to date has become instant bank profit.

Example:

300K, 30-year loan at a fixed 5.5%; monthly payment $2078 (assumes $4500/property taxes + insurance = $1703 mortgage only).

Total interest to be paid: $313,210 Total principal of course $300,000

2 years into it and you refi. Assuming a roughly 90/10 interest/principle spread, you've paid $36,784 interest - some of which you get back from mortgage interest/property tax deduction. Principal repayment is therefore $4,087.

For your refi into a new 30 year 4% fixed interest rate loan: Principal repaid thus far basically equals your costs into new loan - standard practice is have the refi costs roll over.

Now you're looking at 30 years at 1807/1432 month.

Net interest paid: $215,607 ; principal still $300K.

The good news? You've saved 313210 - 36784 - 215607 = $60,819 in lifetime interest payments. $36784 paid in the past and $215607 to be paid in the future.

The bad news? You paid $40,872 to do it. All the past principal and interest payments for the 2 years - but excluding the $4500/year tax+insurance.

If you'd stayed 3 years instead of 2, then the equation is: $55,177 interest paid, 6130 principal repaid, 1797/1422 PITI/PI, $298K balance.

Lifetime interest saved: 313210 - 55177 - 214170 = $43,863 for which you paid $61,308 for the privilege of.

And this is for a significant interest rate delta from 5.5% to 4%. A 6.5% to 5.5% shows even worse ratios.

This is the exact converse of the bank's game: borrow short and lend long

[leegs]

Re: Conforming Mortgages below 5%

c1ue, I think you are double counting the effect of the interest on the original mortgage and the closing costs. Your calculation of net savings of $60k tells most of the story - subtract the $4k closing costs and that is the final answer. To say that you paid $40k for that implies (to me anyway) a net savings of only $20k. Your scenario does illustrate 2 big problems with refinancing: 1 - loan costs, of $4k in your example; and 2 less intuitive but more important - extending the life of the loan, from originally 30 years, to now 32 years (2 on the first mortgage, 30 on the refi). I think that this is why your 3 year scenario is worse than the 2 year, because then the total life of the loan is extended to 33 years. So, being the smart thrifty people that we iTulipers are, if we refi, and then pay off the new mortgage in 28 years, then the total savings are $78k (versus $62k* if you refi and pay off in 30 years) * The 62 vs 56 figure is due to a different calculation of interest paid in the first 2 years - I came up with 32 vs 36k).

[leegs]

Re: Conforming Mortgages below 5%

Sorry for the crappy formatting in the post above. I can't figure out how to prevent it from cramming all of my text together.

[bpr]

Re: Conforming Mortgages below 5%

Here's the problem: interest rates can't stay this low forever. When they go up, house prices will fall harder. They are prolonging the crash here, possibly worsening it.

I'd rather buy a $100k home when rates are at at 20% (of course, it'll likely have to be a cash transaction, as no one will have money to lend) than a $400k home while rates are at 5%. Or a $25k home instead of a $100k home.

You can always refinance your borrowing terms when lending gets better, but you'll never renegotiate the purchase price of your home. As a renter, that's JMHO.

[Scott4139]

Re: Conforming Mortgages below 5%

let 'em go to 0.000000%, no equity no qualify - end of story.
Scott

[santafe2]

Re: Conforming Mortgages below 5%

This is a crazy waste of money in an attempt to keep the FIRE economy alive. Wrong solution at the wrong time.

Reasonable points and there is no doubt this is a huge effort to save the FIRE economy. My take on this is that step one is to bring mortgage rates down as far as possible. I suspect that's going to be an historic low. Maybe make these loans almost impossible to exit without payment as EJ pointed out regarding mortgages in Japan and not unlike student loans today in the US. Then begin to make them available to anyone with a proven capacity to pay. I don't think it will matter terribly that low interest loans will be made to people upside down in their equity position. Once inflation kicks in, the true value of the payments will move down quickly and the nominal value of the home will move up creating equity. The key is long term low interest loans owned by Federal government.

I'm not taking a position on this debate as you did in your post. I'm diagramming the moves as I see them unfolding and looking for more input from the iTulip community. I don't think it's so important that we all agree on whether this is the right course but it is important that we discuss the course and agree on its direction so we can best prepare ourselves for the most likely scenarios.

[santafe2]

Re: Conforming Mortgages below 5%

Cool, I should have no problem refinancing with my negative $50,000 in equity.

It's like giving a starving man a set of silverware.

Let's use your analogy to move this argument forward. Today, the starving man is not being offered silverware, he's being left to starve, (as you might be pointing out in your first sentence).

Toast pointed out that this is a great plan today for the upper middle class, the top 10-15%, but leaves everyone else swinging in the breeze. He's of course correct today, but I don't think this is the real plan because if it were, it would cause class warfare in this country over the next four years. I'm sure the incoming Administration and Congress don't want this outcome so we might be better served to read the first move in the chess match as a move and not as the plan.

I described in my last post what I think the plan will be. On that, I'd like all the feedback I can get because I could be 180 off and I'd much rather a few people here point out how bad that idea is than have the market prove me wrong the hard way.

[santafe2]

Re: Conforming Mortgages below 5%

I'd say it depends on your local housing market situation.

You make many good points when comparing a long term fixed loan to another long term fixed loan. I'm hoping the point iTulip members and readers will take away from this thread is that this is the time to lock in a long term, low interest loan if you've not done so. As the article pointed out and others on the thread have pointed out, today is probably not the day, but that time is coming.

Many, many Americans have too much debt. I think this group of politicians are working up a get out of debt free card for those willing to lock in debt they can't payoff. The financial hurricane is not here today, but it looks like it's coming.

Ten years from now the US$ will not be worthless but it will certainly be worth less and debt locked in today will be paid off with a worth less currency.

[santafe2]

Re: Conforming Mortgages below 5%

Here's the problem: interest rates can't stay this low forever. When they go up, house prices will fall harder. They are prolonging the crash here, possibly worsening it.

On average housing tends to go up just slightly more than inflation and housing costs for a similar home tend to match the cost of rent. We're still well outside these normal parameters. If you're renting, this is a great time to rent. It won't always be this way as more people move into rental living spaces, but it is today.

It's important to understand that prolonging the crash is the entire point of these lower rates and the moves that follow. You'll see the same thing happen with the US$. It will take a slow, long slide. Time is a great healer of huge mistakes and we're working our way though this one now.

I'm not a fan with regard to letting the financial system crash - the 'get it over' crowd. There is a tipping point and while some want the US to exceed that point and reach a point of revolution, of a complete cleansing, I see no glory in that position, only war and genocide and too likely, an end to our system of government.

[c1ue]

Re: Conforming Mortgages below 5%

Leegs,

You are correct - the positioning I wrote implies a relationship.

The point is still the same though - the apparent gains from the monthly mortgage reduction obscure the fact that past interest paid is now pure riskless profit for the bank, and in turn reduces the apparent gain from the refi.

This is not to say that refis are a bad idea. I just wanted to make sure everyone has a clear idea on what exactly is gained.

Secondly any mortgage of any type is, as is also pointed out by other posters, also accompanied by a derivative bet on your own job stability, the integrity of the schools/area you live in, etc etc.

The point is simply that 30 years is a friggin' long time and care must be taken whenever undertaking any such obligation.