Mortgage Confidential: Is Now the Time?
Filed under: Real Estate, Mortgage Confidential
Mortgage expert David Reed invites Walletpop readers to ask him questions about real estate financing. leave your questions in the comment section of this post.
Q: What are your thoughts on the feds likelihood of dropping the interests rates again. I'd like to buy a home during this period of lower home prices, and relatively low interest rates. Trying to judge the housing market and interest rates to get them at there best levels is tricky. When do you think it will be the best time to jump in to get the most for my money. Thanks in advance, Steve
A: Steve- Fixed mortgage rates anticipate Fed moves and don't react to them. When the Fed makes a cut, mortgage rates view that move as an indicator of the future of the economy. When the Fed slashed the Fed Funds rate over a series of cuts, mortgage lenders saw that the Fed interpreted our economy as in dire, dire straits. Rates moved downward as a result. Wall Street is in general agreement that the next Fed cut will be a less draconian 1/4%.
But there are rumblings of an economy that's recovering. As well, inflationary fears are still being stoked. This is a double whammy for mortgage rates and in a bad way. First, mortgage lenders as well as the rest of Wall Street have already factored in a 1/4 point cut at their next meeting. Combine that with next week's barrage of sensitive economic data, most importantly payroll numbers, wage inflation, and the core price index and it's dicey at best. Finally, if you look back at all the Fed moves, mortgage rates are always higher after the last Fed cut. The trick is figuring out when that last Fed cut might be.
I agree with you, home prices are at relative lows as are interest rates, but the crystal ball simply isn't that clear to accurately predict the future. But a best guess is always in order. And my best guess would be to buy now. If rates go down even further sometime in the future, you can always refinance. But if they start to rise, you made a mistake you'll be paying for every month each time you write the mortgage check. -David
Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.
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Reader Comments (Page 1 of 1)
4-28-2008 @ 11:18AM
Skeptictank said...
If you look at what's happened every time the Fed lowered rates since September it looks like mortgage rates go down for a few days but then steadily begin rising again until they are back around 6% - about what they are now.
As far as buying now goes: why? It's reasonably certain that home prices aren't going up any time soon. In fact in many areas they're still falling and the rates of decline are, if anything, increasing. Look at a chart of ARM resets: Subprime resets peak this year (right about now) and since foreclosures are already at record highs and it takes 6 months or so to go into foreclosure, you can make a pretty good guess that there will be even more foreclosures by year end. Then consider that Pay Option ARM resets begin in 2009 and peak in about 2011 - these are not considered "subprime" loans, yet they have proven just as dangerous as about 70% of the people with these loans make minimum payments every month which means they actually owe more on the house every month (negative amortization) when those reset the monthly payments will skyrocket... so look for more foreclosures in 2009 - 2011 caused by those types of looney loans.
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4-28-2008 @ 11:27AM
David said...
I think there's been too much hay about resets. Neg-am, hybrids and ARMs have been around for decades as well as the inherent reset. Resets don't automatically "skyrocket" rather they adjust based upon the current index plus its margin. The 1 yr Treasury last year was around 5.00% or so, and when you add a common margin of 2.50% the reset would be 7.50%. High, but not nosebleed.
Both the LIBOR and 1 yr Treasury have continued to fall and if you were to reset today your rate would actually fall to 4.3%. Subprime margins are much higher than their alternative brethren but didn't make up the bulk of loans issued during that period.
And foreclosure rates are actually DOWN in some states in a big way, the latest data from RealtyTrac showed Texas' foreclosure rate actually DROPPED by 62%.
There's no way to predict when home prices will stabilize and it's also not fair to paint the entire country with such a broad stroke.
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4-28-2008 @ 1:13PM
Skeptictank said...
The problematic issue with Pay Option ARM resets is that if the borrower has been making the minimum payment (and there is data to suggest that the majority have been doing that) then at some point (usually at the 110% loan to equity point) those loans go fully amortizing - THAT's what makes the monthly payment go up much more than is the case with subprime ARMs.
Oh, and Libor has been rising - there's been a bit of a scandal about banks understating Libor rates. Now this appears to be adjusting.
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4-28-2008 @ 1:20PM
skeptictank said...
For more on the Alt-A problem check out Mr. Mortgage Guy's video here:
http://www.youtube.com/watch?v=pmeBSWI9sF8
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