Why are mortgage rates so high after all the cuts made by the Feds?
I'm looking to refinance my mortgage but these numbers don't make sense! Should I wait?
Answers
4075 points
EthanR answered one year ago …
It may surprise you to learn that FED cuts and mortgage interest rates are not joined at the hip. In fact, they often move in opposite directions. FED cuts are about short term interest rates, such as car loans, credit cards, and Home Equity Lines of Credit. Mortgages are about long term interest rates, such as 15 or 30 year fixed loans. However, the FED cuts do help the 1 year Adjustible Rate Loans.
My second point is that when the FED cuts rates a lot to stimulate the economy, it often has an inflationary result. Since Mortgage rates are tiered to the bond market, and since the bond market does poorly during inflationary times, inflation makes mortgage rates rise. So sometimes if the FED raises the FED rate, the bond market sees it as fighting inflation, and bonds do well, thus lowering the mortgage rates.
What would really help the mortgage rates right now is a continuing decline in the price of oil. That would help to tame inflation and improve the bond market. If I were you, I wouldn't wait too long to refinance that mortgage, especially if you don't have that much equity in your home. If prices continue to decline, you could find yourself locked out of the ability to refinance. Also, you didn't say how much your mortgage is, or if you are refinancing from a 30 year to a 15 year, or from a 30 to a 30 year, so it's hard to say what interest rates you are seeing.
I would recommend that you go to a mortgage calculator (see link below), and put in all of the information to see how your mortgage will change. It might not be as much as you think, especially if the principal amount is low. And by the way, most of the time it does not make sense to refinance, unless you are going to stay living in the home for at least five years. This is because the closing costs when you refinance take a long time to be made up by the savings each month. Some mortgage companies roll the closing costs into the mortgage amount, and you may think you are saving money, but you are really financing the closing costs over the term of the mortgage.
Good luck with it!
2769 points
Oldman answered one year ago …
EthanR's answers are really good,(and he has extensive real estate experience)--- but you need to understand that mortgage rates will go higher because the banks and companies need to increase their capital to make up for the losses to their portfolios, caused by the increasing numbers of delinquent, non-performing and sub-prime foreclosures, + tighter requirements for loss-reserves and capital required for the banks, themselves, to acquire liquid reserves to loan for mortgages. this is happening allover the world. Britain, Spain, etc. and yesterday China have increased the capital requirements at regional banks.
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Oldman answered one year ago …
P.S. "IBaldwin" asked a similar question about one page (a dya or so ago).
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Sensei answered one year ago …
Bearing in mind EthanR's first sentence (which is extremely important to understand) allow me to answer this question using a different approach.
Think of mortgage money (or any other loan) as a commodity. Like any other commodity, it has a price. And the "price" of a loan is called "interest."
When there are more buyers than sellers (i.e. more people wanting money (e.g. a mortgage) than people willing to lend or, using another analogy, more demand for loan money than there is in the "system") the "price" of the money goes up. When there are more sellers than buyers (i.e. more money to be lent than the demand for that money from potential borrowers), the "price" comes down. It's the Law of Supply and Demand all over again.
The current problem, as you know, is that the banks have suffered extreme losses on loans they've made in the recent past. The "snowball effect" means that these losses are not just mortgage loans, but all loans. Those loan losses have made them gun-shy. Yes, it has impaired their capital as Oldman has pointed out, but more importantly, it has impaired their profits and their profitability. What I'm saying here is that even if those losses did NOT impair their capital (which I agree it did), any loan loss experience, if severe enough, would have created a similar mindset - a reticence to fund further borrowings except to those with extremely good credit.
Now if this only happened to a few banks, it probably wouldn't matter. But it happened to (almost) ALL banks and other lending institutions. Reticence by the banks to lend money means that there is less money in the "system" to be advanced (i.e. fewer "sellers") and that means the Law of Supply and Demand will cause the "price" of those loans - the interest rate - to go up (or, at least, remain the same.)
In short then, the FED has nothing to do with it ... it's the Law of Supply and Demand.
As an addendum, may I refer you to an excellent book dealing with demographics called "The Pig in the Python". In that book, the author explains why interest rates in the early 80's rose so dramatically. It was NOT because of some FED policy. It was because people in their mid-20s and 30's did what their parents did - they bought homes. Moreover, these people were "baby boomers" - about 1/3rd of the population! Suddenly, there was a huge demand for houses ... which drove up the price of housing. People buying houses need mortgage money. And all those boomers wanting mortgages created an increased demand ... which drove up the "price" (the interest rate.) The FED policy was in response to that. It wasn't the "driver." Even if the FED had not increased the "funds rate" - or even if they'd lowered it, the mortgage interest rate would have gone up dramatically in any event. The Law of Supply and Demand says so.
2082 points
alanj answered one year ago …
I don't know what you call high but I've recently seen or heard some lenders ads for 30 year fixed between 6%-6.5%. That's not very high. Compare it to the high of 22-23% during the Jimmy Carter presidental years. If your looking to refinance do it now. And make sure it's a fixed rate, not one of those ARM's unless you plan on selling within the next 5 years. Interest rates will soon be heading up. Investors are starting to pick up bargain properties which will start to increase the demand for mortgages which will cause the interest rates to increase. Do it today, don't wait. You may want to try some of the internet lenders.
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