Hoboken Mortgage 411

3/25/2010:

Presenting a new periodic article series here on Hoboken411 – aptly titled “Mortgage 411.”

Each month or two, Dave Carty from Hoboken-based Mortgage Associates, Inc. will chime in with a piece about the current Real Estate market and home financing. Dave is a loan consultant with MAI and has been actively involved in the Hoboken real estate market for 15 years. We’ve arranged to get a bi-monthly update on the “haps” in the mortgage markets from MAI. Take it away Dave!

The Great Recession?…..

It’s Like Deja Vu All Over Again! (Yogi Berra)

Stock Market Correction! Economic Stagnation grips the country! Unemployment rate hits new highs! Oil and gas prices rising again! Congress gridlocked! Democratic president under fire!

At first look you might be tempted to think these headlines are from today’s, but those of us of a certain age remember similar headlines from the late 1970s. While there are lots of similarities between the 1970s and the last few years, not all the same. Your 401k may be shrinking, you may be paying more for gas, but there is one major part of the current economic climate that many consumers can, and should, take full advantage of and that is the historically low interest rates available to consumers for home purchases or refinancing.

Some of you my not be old enough to remember, but that crazy decade called the ‘70s, not only gave us disco, Larry Bird, Magic Johnson and Star Wars, it also gave us inflation and sky high interest rates, which made home buying and other borrowing prohibitively expensive. Check the history books folks, prime rates of of 10, 12, and 14%, peaking at near 21% in 1982 !! Compare that to today’s 4%-5% mortgages.

With all the chaos surrounding the economy in the past year we thought we’d take a closer look at one of Hoboken’s most important business segments, real estate, and more specifically mortgage lending.

If we’re living in the worst economic times since the Great Depression why is it such a great time to get a mortgage?

Find out what to expect, and more – after the jump…

(Hoboken Mortgage 411 – continued…)

What can you expect?

To start it’s important to know what’s been going on over the past year and what a borrower can expect in the current market.

Despite the minor fluctuations in mortgage interest rates over the past year, it remains a great time to borrow money for a home purchase, to refinance an existing mortgage or to consolidate debt. Why?

Well, first of all let’s define what a mortgage is. A mortgage is a loan that is secured by some kind of real property such as a house, condo or land. You borrow from a bank or other lending institution. You take title to the property, and as long as you make the regular payments as stipulated in the mortgage document you retain title (ownership). Fall behind and you risk the bank or lender taking possession (i.e. repossessing) the property.

What got us here?

By now, most of us are familiar with some of the causes of the recent financial crisis. Exotic investment products like the now famous credit default swaps, and extremely lax lending standards by banks are just two. Clearly people who were not qualified to borrow were encouraged to do so and purchased properties beyond their ability to repay the loans. When the value of the properties stopped rising and new interest rates on the loans went in to effect. Many of those borrowers lost their properties and banks now had loans out on properties that were worth less than the original loan (i.e. underwater).

Multiply this by thousands and you have one of the main causes for the financial meltdown of the past year.

How is this good for me?

That was then and this and this is now. For responsible borrowers whose goal it is to purchase a home, investment property or consolidate debt there has rarely been a better time in history to borrow money. Why?

Well, lot’s of reasons but primarily a combination of extremely low interest rates and a current policy by the US Federal Reserve (the Fed) to keep interest rates low for the foreseeable future. To really understand these phenomena you need to know what drives mortgage interest rates.

Economics 101

The Fed is responsible for setting two key short- term interest rates- the Fed Funds rate and Discount rate which in turn influence the direction of all short and longer term interest rates. Banks and other lenders use the rate on the 10 year Treasury Note ( T-Note) to set interest rates on their on their mortgages. The lower the rate on the 10 year T-Note the lower mortgage interest rates will be. The higher the rate, the higher mortgage money is. So what?

Well, the Fed has publically stated that in order to stimulate the economy and assist the country in climbing out of the ruins of the great recession, they intend to keep rates at historic lows for the foreseeable future. This has resulted in some of the lowest mortgage interest rates in history during the past year. From time to time rates have bounced up slightly from record low, to near record low. But by any measure these rates are fantastic whether at record low or near record low. So in the near term while the Fed keeps rates low, the rate on mortgages will bob slightly up and down but overall they will remain in this very attractive range.

So what should a consumer do?

How long will this go on? Its tough to say but one thing is for sure, interest rates will not stay this low forever. Eventually the Fed will begin to raise the Fed Fund and Discount rates as the US economy continues to stabilize and begins to grow again. When that happens mortgage rates will rise. Those who locked in now with 15 or 30 year loans at record low interest rates will be very happy. Those with adjustable rates that will then reset to higher rates will wish they had refinanced and locked in with lower rates.

So who should borrow money in today’s market?

First and foremost, responsible borrowers with the ability to repay the loans. If you’re contemplating buying a home you will find some of the lowest mortgage interest rates ever which will allow you to save significantly on your interest payments over the life of any loan. If you have a variable rate loan that is subject to annual resets you may want to consider refinancing to fixed rate loan since as rates go up in the future your variable rate mortgage will also go up. Lastly, if you have a fixed rate mortgage you may be able to refinance now at a lower rate, reduce your monthly costs and reduce the amount of interest paid over the life of the loan.

Thanks Dave! We’ll check in again with Dave at Mortgage Associates in about two months or sooner if breaking news and/or events in the mortgage industry warrants. In the meantime, go take a look at your most recent mortgage statement or canceled rent check and consider if this is the right time for you to take advantage of these historically low rates.

www.maimortgage.com

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12 Comments on "Hoboken Mortgage 411"

MidnightRacer
Member

Question for Dave Carty

Given today’s news articles, and according to senior officials, Obama has announced that he will require that the lenders of mortgages slash or eliminate monthly mortgage payments for borrowers who are unemployed. That these mortgage payments, Obama demands, will have to be reduced to 31% of the borrower’s income, or not even make payments.

bloomberg dot com “U.S. Said to Widen Homeowner Aid, Subsidize Mortgage Reductions”

washingtonpost dot com “Obama readies steps to fight foreclosures, particularly for unemployed”

How would you guess this would affect those new home buyers applying for a mortgage? Would there be an additional cost in interest or fees to make up for this loss? Would the same apply to investors who would like to purchase property as a rent investment in Hoboken?

HansBrix
Member
HansBrix

One more:

* Who was helped more by the recent home buyer tax credit: buyers or sellers?

Russ
Member
Russ

This one’s a trick question. They both benefited. The one who did not was the US taxpayer, so most people reading this got screwed.

In response to HansBrix who said:
One more:

* Who was helped more by the recent home buyer tax credit: buyers or sellers?

HansBrix
Member
HansBrix

Yes the tax payers got reamed.

But do you think the credit had any effect on house prices? Check the Case-Shiller stats.

In response to Russ who said:
This one’s a trick question. They both benefited. The one who did not was the US taxpayer, so most people reading this got screwed.

HansBrix
Member
HansBrix

More questions:

* What is the price-to-rent ratio in this town and what is the trend?

* How do “historically low interest rates” make homes more affordable? For the same size payment (the main criteria for underwriting affordability), wouldn’t HIGH rates be better for the buyer?

* We always hear that “now is a good time to buy a home” (even in 2006) Is there ever a time when buying ISN’T a good idea (for the buyer)?

Russ
Member
Russ

Interest rates are nearly just as important as direction of housing prices.

Higher interest rates would be AWFUL for a buyer. The cost to borrow money increases, so unless you are putting straight cash down, interest rates make a huge difference.

In response to HansBrix who said:
More questions:

* What is the price-to-rent ratio in this town and what is the trend?

* How do “historically low interest rates” make homes more affordable? For the same size payment (the main criteria for underwriting affordability), wouldn’t HIGH rates be better for the buyer?

* We always hear that “now is a good time to buy a home” (even in 2006) Is there ever a time when buying ISN’T a good idea (for the buyer)?

HansBrix
Member
HansBrix

But you assume prices will remain the same regardless of rate. They won’t.

Yes, higher rates make payments bigger. But recall that people make affordability decisions based on payment size. If rates were high then the principal portion would have to be smaller to keep the same payment size affordable to a given point of aggregate demand. Eventually this translates into lower house prices or at least downward pressure on prices as fewer people can afford a particular price point.

The lower the price, the smaller the necessary down payment.

The higher the “I” in P&I the higher the tax deduction for a given sized payment.

Finally, a high interest rate can be refinanced down. The borrower is stuck with high principal amounts.

Higher interest rates are GREAT for buyers but lousy for sellers.

In response to Russ who said:
Interest rates are nearly just as important as direction of housing prices.

Higher interest rates would be AWFUL for a buyer. The cost to borrow money increases, so unless you are putting straight cash down, interest rates make a huge difference.

jazzeru
Member
jazzeru

thanks dave! just a few questions for you:

– you say the dow, sorry the economy is continuing to “stabalize and grow”… what do you think will happen when the fed withdraws its unprecedented support to both the mortgage & stock market?

– you talk alot about interest rates, but what is your outlook for residential home values in the next 3-5 years?

MidnightRacer
Member

Saw a listing in the back for under $200k.

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