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Home Loans & Interest Rates
What Does the Future Hold?
As we begin the month of May, it seems like a good time to examine rates for home loans and where they're headed for the remainder of the year. Interest rates have recently risen to levels not seen since 2002. At the end of April, Freddie Mac stated that a 30-Year Fixed Rate mortgage had reached an average of 6.58%. According to Bill Dallas, Chairman and CEO of Ownit Mortgage in Agoura Hills, CA, interest rates should continue to "climb to 7.00% by year end" for the same 30-Year Fixed Rate program. Before we discuss the future further, let's take a look at the factors that have brought us to where we are today.
Everyone knows that real estate has been THE hot market in the U.S. economy over the past several years. Led by a seemingly endless fall in mortgage interest rates, housing sales rose to an unprecedented record of over 7 million units in 2005. As dramatic as these numbers seem, they were dwarfed by the total dollar volume of mortgages originated in 2003. In that year, over $3.7 trillion of mortgages were originated by banks, mortgage companies, and mortgage brokers. This number started to fall in 2004; and in 2006, the total mortgage volume is expected to land below $2.4 trillion.
What led to 2003's incredible increase in volume was more than just low interest rates. There was also a dizzying array of new mortgage products which allowed more people to become homeowners than ever before. These products continue to be used today and include interest only mortgages; monthly payment options; and increased terms, including a loan that gives the borrower 50 years to repay the note. Some options even allow borrowers to make mortgage payments that do not repay the entire interest due on the loan, resulting in what is known as negative amortization.
When these new mortgage options came out, they also enabled existing homeowners to refinance for lower mortgage payments, consolidate existing debt, and pull cash out for other uses. These uses include home improvements as well as investments outside the home. Refinance volume was so strong that in the years 2001-2003, the refinance volume surpassed the entire mortgage volume for the year 2000.
Any increase in available mortgage products stands to benefit someone. Whether it's the first-time homebuyer struggling to come up with enough money to cover the down payment and closing costs, the move-up buyer trying to get just a little more house, or the investor, all benefit if a new product makes financing the home possible.
Expanded mortgage options do not come without a cost though. When products are rushed to market, they don't always perform as well as expected. Some homeowners are now finding themselves in the position of being unable to meet their mortgage payment. Foreclosures are on the rise across the country, and many investors and mortgage companies are finding it difficult to sell mortgages on the secondary market.
As this occurs, some products that were widely available just last year are being pulled back. Other products are experiencing a dramatic increase in interest rates. This is most evident in the sub-prime market where homebuyers and homeowners often go when they have less than perfect credit. Bill Dallas expects that the sub-prime market will not fare well, making it more difficult for homebuyers with imperfect credit to qualify for loans.
However, there is also a bright light on the horizon. According to Dallas, there will be a "greater diversity in ARM (Adjustable Rate Mortgage) products" in the coming years. Most homebuyers have figured out that they probably won't live in their home for 30 years and don't necessarily need the security that fixed rates offer. ARM production has increased in recent years to nearly one third of all mortgages originated.
In many respects, taking a Fixed Rate Mortgage is similar to purchasing insurance. Fixed Rates typically come at a rate premium as compared to ARMs; and if the mortgage will only be in effect for less than seven years, an ARM often makes more sense economically for the homeowner.
As home values have increased, so has the volume of Home Equity Loans and Home Equity Lines of Credit (HELOCs). However, each time the Federal Reserve increases interest rates, the rates on these loans have increased as well. Most economists predict that The Fed will increase rates for a 16th straight time on May 10th. If this occurs, the Prime Interest Rate will be at 8.00%. HELOCs typically have rates that float along with Prime. With the Fed rate bump on May 10th, many will find that their new rate will be near or even exceed 10.00%! If you have a large balance on a HELOC, now is a great time to seek advice from your mortgage professional regarding whether you should look into consolidating it into a new loan or restructuring it.
Just as you review your finances and taxes each year, it is also wise to revisit your mortgage(s) and current monthly obligations. Your Mortgage Professional will be able to offer you an evaluation regarding the options available to you. Regardless of whether there are money-saving alternatives available or you're fine with what you have, it makes sense to make the call.
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