Wed 26 Jul 2006
Every once in a while, I get this wierd urge to check the latest mortgage rates. For me, it’s not enough to just look at Bankrate.com or to hear the nuggets that show up on the evening news…
Instead, I actually go and plop in my credit score, loan amount, etc. over at E-Loan. I got my mortgage from E-Loan when I first bought my house, and their website is probably the easiest to use and has the most reasonable rates of any that I have seen.
So, despite the fact that everyone is saying that we have the highest rates since 2002, the rate for my loan would be a whopping 7/8% higher than 1.5 years ago when I locked in my rate. The monthly payment would be an incredible $86 more.
Yes, rates for ARMs have gone up much more than the rates for fixed mortgages, but they also went down a lot more in 2002 as the FOMC was inflating the housing bubble er… lowering rates. ARMs are not as rate competetive as they used to be, i.e., the situation is returning to normal.
July 27th, 2006 at 1:22 pm
I kid you not that as I read this I was listening to this podcast (http://knowledge.wharton.upenn.edu/audioplayer2.cfm?audiofile=KW_Siegel_Econ_RevB.mp3) and as I read your comment about rates not being much higher, the guy said exactly the opposite (listen from minute 8:15). How funny that perhaps the experts are simply parroting each other without actually getting real, practical data like you did. Or do you think there is something specific about you and your credit rating that might not represent the masses?
July 27th, 2006 at 2:29 pm
I’m sure my specific situation is the most buffered from rate fluctuations (very good credit, 15 year mortgage, non-jumbo amount; not doing “100% financing”, etc.).
The media knows where their advertising money comes from. Banks (mortgage companies) always press to say “lock in rates now before they go up!”, realtors say the same (buy now before rates or prices go up even higher). For anyone who doesn’t dig deep, that’s the status quo.
There’s also a tendency to use the most sensationalistic terms possible. “The rates are the highest they’ve been in 5 years!” instead of “rates are up 1.5% from the lows”. A sense of urgency causes action, which in turn begets fees, profits, and newspaper sales as everyone tries to game even their home buying.
July 27th, 2006 at 2:57 pm
Well said. That general description works for so much in the financial world, not just real estate.
July 28th, 2006 at 11:59 pm
Yeah, rates are still plenty low and aren’t really moving all that much.
I have a sweet ARM deal that I still prefer over any fixed option out there. Personally, I like ARMs because it front-ends the savings now while my income is lower and my cost of living increases that will kick in every 2 years will be well within my ability to cover. It also makes it easier to make higher principle payments early in the life of the loan since you’re paying less per month, and this has a profound impact over the life of the loan. Simply put: the ARM incentivizes me to pre-pay my loan.
The terms of my ARM are not terms available for comparison at eLoan. I have a 2-year ARM with a rate adjustment every 2 years of +/- 1.00%, and it started at 3.75% in 2004. Assuming rates continue to go up 1% every 2 years, in the 10th year of my loan my rate will peak at 8.75% but will average 5.75%. 8.75% is also as high as my loan can go. By then, I plan to have the house paid off or sold. If by some horrible circumstances rates flatline at 8.75% from year 10 onward and I’m unable to pay off the loan until year 20, then the average interest rate I would have paid over the life of the loan will be 7.25% with the higher interest occurring on the months with the lowest balance. These are ideal terms.
One additional item that Jason is aware of but worth mentioning: I can make principle-only payments on the last day of the month, but the bank pre-dates the payment to the first of the month. Translation: If I plan on making a $2,000 principle payment, I can collect Money Market interest on this money for nearly 30 days then make a loan payment. Nice small-time arbitrage.
July 29th, 2006 at 12:04 am
John, you leave out one other important point that I’m aware of… your bank automatically re-calculates the amortization of the loan based on your current principal after making additional payments towards principal.
99% of banks do not do this. The amount of interest per payment is fixed at the time the loan is opened, and prepayment of principal does not change it.