Hoboken Mortgage 411
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.
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.