I vividly remember hoping – cross-the-fingers wishing – for a home-loan rate of less than 12 percent.
In the early 1980s, double-digit interest rates had bobbed up and down like a kid in an autumn apple barrel. We had one child in the house, another one on the way and I knew exactly how much cash the bank would lend us if rates remained steady.
“Man, oh man, just give me 11M\,,” I said aloud at the dinner table. We can fly with anything under 12.
Today, while some consumers are gambling and waiting for the absolute bottom (like stocks, you won’t know until they move up), I’m encouraging folks who are shopping for a home or planning to stay put for a few years to lock in to a program that seems best for them.
It’s time to run some numbers for many people, said Eric Aasness, mortgage specialist at Countrywide Home Loans. You’d be surprised how many people have fairly high rates on their mortgages. And, the first question to ask is how long are you going to stay in the home.
While mortgage rates are not expected to leap any time soon, it’s usually better to close on a loan and start accruing home equity via appreciation than to gamble that rates will come down. And remember, interest rates are like stocks: You don’t know when you’ve hit rock bottom until they start heading back up again.
Five years ago, fixed-rate loan borrowers looking to lock their rate on a new purchase loan or refinance were crushed when a surprise interest rate spike of one-half to three-quarters of 1 percentage point in fewer than 72 hours stunned the home-loan industry.
It was the first time in the past decade that actual rate changes filtered down to consumers three different times in one day.
How did this happen to our lulled-into-low-numbers mortgage market? The weakening of the United States dollar, coupled with a surprise improvement in the Japanese yen and other securities brought chaos to mortgage money that was seemingly untouchable.
In a capsule, Wall Street experienced huge losses, and traders cut back their positions not just in mortgage markets but in fixed-income markets as well. The number of consumers who wanted to refinance compounded the problem. When our Treasury rates took a turn for the worse, mortgage bankers had to lock the loan requests that had been floating with the market. The pent-up demand for mortgage money created the infamous situation lenders viewed as a pig moving through a python.
Because home-loan rates had headed down more than up, thousands of borrowers were confident to pass on locking loan rates given on a specific day for the term of the loan and float with the market. These consumers were gambling that rates would come down before it was time to close on their loan, saving them hard cash over the life of the loan.
The gamble did not pay off. When rates shot up, loan managers locked their floaters fearing rates would go even higher. There was no other logical move to make. Rates were historically low, yet there was nothing on the horizon to indicate that a clear calm was near. The wild time brought higher payments to many consumers caught in the fray, pushed others away from the refinance market and forced lenders to rethink how they could better handle the process.
The home-loan business is centered on collateral (your home) and risk (your ability to repay). If your credit has always been poor and you have a difficult time hanging on to a job, the lender is going to view you as a greater risk than the customer with flawless credit and 20 years of continual employment with the same company. Typically, the greater the risk, the greater the interest rate.
If you are thinking about a mortgage – new purchase or refinance – try to clean up any blemishes on your credit report and weigh all costs and rates carefully before deciding. Make sure you understand no-fee programs and calculate how long it would take you to repay the refinance costs.
But don’t wait for rates to come down. You could get old and lose your dream home waiting for that day to arrive. Mortgage money once cost twice as much as it does today, and that was not long ago.
In fact, things simply haven’t been much better in the past 30 years.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
