Tag Archives: interest rates

When mortgage rates do not decrease as expected

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The Fed cut interest rates. Mortgage rates did not go down; they went up:

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Since Fed Chair Jerome Powell lowered interest rates by 50 basis points on September 18, the average 30-year fixed mortgage rate has moved higher, not lower.

According to data from Mortgage News Daily, the average 30-year fixed mortgage rate has jumped about 47 basis points since the Fed rate cut, to 6.62% from 6.15%…

Going forward, the situation hinges on the Fed’s rate-lowering schedule. At present time, market expectations — as calculated by the CME FedWatch tool — are for two more 25-basis-point cuts this year.

Whether that will manifest itself in lower mortgage rates is up in the air. Two major upcoming events are the Consumer Price Index release this Thursday, as well as the October jobs report in the first week of November.

Life does not always go as predicted. However, this saying does make it easier to work with the unexpected happenings. And with large-scale systems, lots of people might hold an expectation or be told something will happen. With all the moving pieces in the financial system (plus its interactions with other parts of the world), patterns can change or there can be exceptions to regular patterns. Since home sales are an important part of economic, social, and community life, any changes like these have ripple effects. If it slows down home purchases and selling, this affects a lot of actors.

One question to ask is whether there are certain periods or conditions when the predictable is less likely to happen. Is this rise in rates when they were expected to go down a one-time occurrence or part of broader instability? How predictable are mortgage interest rates given particular circumstances?

Sustaining McMansion purchases with low interest rates

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If architecutural critiques of McMansions do not dissuade potential buyers, enticing interest rates might prove persuasive. One Southern California mortgage broker explains:

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Maybe you, too, can afford a Southern California McMansion. How about paying just interest, not principal, at a rock bottom 1.875% mortgage rate for the first three years?

For a $1.5 million loan on a $2 million home, your house payment is locked down at $2,344. Assuming monthly property taxes of $2,083 (1.25% annual property tax rate) and $250 for monthly homeowners’ insurance, your total house payment is $4,677…

If rate and payment uncertainty gives you too much heartburn, you can find longer interest-only lock terms of five, seven or 10 years in the 2% to 3% interest rate range on 30-year mortgages.

Even 30-year jumbo fixed rates are super cheap. I’ve found rates as low as 2.375% for Inland Empire properties, where jumbos start at $548,250. In Los Angeles and Orange counties, where jumbos start at $822,375, rates are as low as 2.625%.

Why buy a McMansion? Because it is relatively cheap due to low interest rates. As the commentary notes, renting a McMansion could be significantly more costly than buying. Since Americans like large houses and this is an expensive real estate market, a large McMansion at reasonable rates may look like a good deal.

At the same time, the idea of even cheaper interest rates for just three years should cause some pause. What happens if interest rates go up? This sort of approach sounds like some of the mortgage options of the 2000s that helped lead to difficulties for some in keeping up with their mortgage.

Another way that McMansions could continue to be an attractive financial option in the future is if their relative value drops compares to other homes. If fewer people want such a home, this might depress values to a point where others who value space or like other McMansion features might be able to get a bargain.

How a bank could still make money offering negative interest rate mortgages

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A bank in Denmark explains how they can make money by offering mortgages with interest rates below zero:

Jyske Bank has had to do a lot of clarifying; there’s a widespread misconception that the bank is actually paying borrowers to take their money. First of all, the bank is not actually paying anyone; it is simply forgiving part of the loan each time a payment is made. A mortgage borrower is likely to end up paying Jyske back a little more than they borrowed, factoring in fees and charges associated with arranging the mortgage loan.

And the bank can afford to do this without losing money because it borrows at negative interest rates as well…

Despite being in “historic remortgaging,” Høegh said the negative interest rates don’t actually make it any easier for home buyers to get a loan, but makes it easier to get a bigger loan – a lower rate means a higher disposable budget.

As long as the borrower is paying more in interest than the mortgage cost the bank, there is money to be made.

I might be showing my ignorance here but it leads to a few more questions:

1. Does this change how much volume in mortgages banks and lenders need to make in order to make money?

2. Would an extended period of such mortgages lead to inflated housing values because people can pay more for homes?

3. These changes might not be so bad in a fairly stable housing market but I wonder if there would be more issues in a high-demand or high-price market.

It looks like we would have a ways to go before negative rate mortgages come to the US but it would be interesting to see what happens if they do come.

Mortgage interest rates may be really low but only a few will qualify

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You may hear a lot of ads for refinancing your mortgage because of historically low interest rates. But, only a small number of people searching for prime mortgages will qualify for the really low rates:

Have a look at a key detail about the criteria for mortgage quotes from which Freddie derives its weekly mortgage interest survey:

The survey is based on first-lien prime conventional conforming mortgages with a loan-to-value of 80 percent…

But the second criterion is even more significant. Let’s say that you have a house worth $200,000 and a mortgage balance of $175,000 that you want to refinance. Your loan-to-value ratio would be 87.5%, so you wouldn’t be included in this average. You might manage to achieve a low rate, but someone with so little equity shouldn’t expect to necessarily achieve rates near this average.

So those qualifying for these ultra-low rates must have pretty spotless credit histories and a pretty significant chunk of equity. That excludes anyone underwater or even slightly above water. And unfortunately, they’re the ones who would benefit most by refinancing. According to real estate analytics firm CoreLogic, about three-quarters of underwater borrowers have mortgage interest rates above 5.1%.

So the low interest rates only really help people who don’t need the help as much? Not much relief then for people looking to lower their payments and perhaps stay in their once-overvalued houses.

This reminds me of an issue that has kind of disappeared from the national news: what about plans to adjust mortgages? As long as the jobs situation remains difficult, have government programs and mortgage lenders made changes so that a good number of people can stay in their homes?